Proof of Stake--What's Really at Stake on the Tax Front?

• Published in: Journal of Taxation of Financial Products Vol. 19; no. 1; pp. 21 - 44
• Main Authors: Ritter, K. Peter, Tompkins, Joshua S
• Format: Journal Article Trade Publication Article
• Language: English
• Published: Riverwoods CCH, Inc 01.03.2022; CCH INCORPORATED
• Subjects: Blockchain; Computers; Crypto-currencies; Digital currencies; Energy consumption; Fees & charges; Income tax; Income taxes; Inflation rates; Loyalty programs; Tax administration and procedure; Tax planning; United States > US
• ISSN: 1529-9287

[...]they provide several considerations for special classes of investors, such as foreign and U.S. tax-exempt investors. The ability to generate yield in a relatively passive manner has engendered significant interest from the cryptocurrency and investment communities and, as of the time of writing, there was over $35 billion staked on the Ethereum consensus layer alone.1 The interest around staking has been further heightened by a recent well-publicized tax case brought by taxpayers seeking a refund from the Internal Revenue Service ("IRS"), as well as by a recent IRS news release.2 These developments have not only increased the interest around staking but also have underscored the tax uncertainty associated with this new and unique technology. [...]Part Four describes the U.S. federal income tax framework applicable to otherwise tax-exempt entities and evaluates how staking income is likely to be treated in that context. On the Tezos blockchain, users are charged a transaction fee for each transaction, which is transferred to validators.18 In addition to receiving transaction fees, validators are also rewarded with new tez ("XTZ"), which is created at a rate of 42 million XTZ per year. Because transaction fees are not burned, if a XTZ holder does not stake their XTZ, their proportionate interest in the network will be diluted over time (i.e.,