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Profits generated by staking cryptocurrencies should not be treated as taxable events. It only makes sense to tax such profits upon conversion to fiat currency. Otherwise, it undermines the Marquee environmental policy of the US President Joe Biden administration.
The Internal Revenue Service appears to be more inclined to treat staking profits as direct income. The penalties for maintaining a relationship with the IRS can be very severe. And taxing, or threatening to tax, gambling profits is bad policy – and Opiumbad politics.
There are many reasons why the staking profits themselves are not taxable. The number one reason is to bring the IRS back into White House environmental policy and fight climate change.
If the IRS does not administratively follow the Biden administration’s articulated marquee policy, it’s time for Congress to clarify the law and ban taxing unrealized profits.
Related: Biden is hiring 87,000 new IRS agents.
Deferring profits until sale simply defers receipt of taxes by the Treasury. The government doesn’t cost even one thin satoshi. So, what happened??
Virtual currencies are legally taxable in many respects. Taxes apply when you sell virtual currency or exchange it for other forms of virtual currency. (Elsewhere, I have called on Congress to enact a deferral of crypto-to-crypto exchanges, a subject beyond the scope of this article.)
Taxing staking profits is the exact opposite of Marquee’s clearly stated White House policy. It also runs counter to the generally accepted notion of good taxation.
Uncle Sam doesn’t tax Jasper Johns while turning a blank canvas into a multi-million dollar artwork. He is not taxed if he entrusts it to a gallery for sale at the price shown. He is taxed when he receives a million dollar check for his latest masterpiece.
This obviously makes sense. Uncle Sam doesn’t receive a portion of the painting (or even interest on a portion of it) to pay taxes. How would an artist be expected to pay taxes on a work in progress or just listed for sale? It would be silly to tax a work of art while it is in production.
Uncle Sam doesn’t tax the contractor while building the house, or even when he puts it up for sale to a real estate agent. The IRS collects taxes at the time of sale.
This obviously makes sense. You can only guess the value of an asset until you sell it, and even if you do, you won’t have the cash to pay taxes until you receive the sale proceeds. Additionally, the IRS does not “treat windows” or pay taxes in kind for lumber or other goods. Taxing housing under construction would be silly!
Taxing ongoing staking profits is pointless and inconsistent with the treatment of other created assets. The IRS claims an Alice in Wonderland policy on this. And taxing such profits does real harm to Americans, and to America, promoting wealth creation and good jobs offshore (contrary to Presidential policy)!
But perhaps the most compelling reason for the IRS to stop taxing staking profits is that President Biden has made reducing CO2 emissions a key priority for the government.
The IRS will tax staking profits when the profits are made (rather than when the profits are sold or exchanged). It seriously undermines two of the administration’s top priorities: We are supporting good work and fighting climate change. Can bureaucracy beat democracy? Embarrassing!
Democrats’ support for a party leader who bans taxes on wagering may be assumed. And certainly enough sophisticated Republican congressmen are passing laws banning the taxation of wagering.
Related: Prepare for 2023’s swarm of incompetent IRS agents
So what’s wrong (no pun intended)? Proof-of-work crypto uses far more energy and produces far more emissions than proof-of-stake.According to the White House Office of Science and Technology fact sheet Outdated September 8, 2022:
“From 2018 to 2022, annual electricity usage from global cryptocurrencies grew rapidly, with electricity usage estimates doubling to quadrupling. […] Switching to alternative cryptocurrency technologies such as Proof of Stake can dramatically reduce overall power usage to less than 1% of current levels. “
Taxing these gains before they are realized also hinders the move toward proof of stake.
In summary, taxing assets at the time of creation has tricky practical issues. People can only speculate on the value of the property until it is sold. The IRS does not accept physical payments (even if they could, they often do not).
Many taxpayers do not have the actual cash to pay their taxes until they realize the sale proceeds. Turning good citizens into tax evaders and criminals through bad regulation is cruel and counterproductive. It will drive cryptocurrencies and the jobs and wealth creation that comes with them out of the United States. And deferring taxation until sales are deferred doesn’t cost the government tax revenue.
More than anything else, treating profits as a taxable event undermines the Biden administration’s stated top priorities of onshoring jobs and reducing its carbon footprint.
Stop treating staking profits as a taxable event! If Biden and IRS won’t listen, Congress should take up this issue.
Todd White Founder of American Blockchain PAC. Ralph Benco Group senior counselor.
This article is for general information purposes and is not intended, and should not be construed as legal or investment advice. The views, thoughts and opinions expressed herein are those of the author and do not necessarily reflect or represent the views or opinions of Cointelegraph.