The Biden administration has made the battle against climate change a cornerstone of its environmental policy. But individuals using cryptocurrencies are inadvertently undermining this policy, thanks to the Internal Revenue Service’s (IRS) stance on staking gains. In this article, we’ll explore the inequity of the IRS taxation on staking gains and propose solutions to ensure that the nascent crypto-economy thrives in an environment of consistent policy and good tax policy.
Technology advances have created a whole new asset class: cryptocurrency, which is often used for alternative payments systems. Like other forms of property, investors may realize profits or losses when they sell or exchange the asset. These gains are taxable and must be reported on their income tax returns. But the IRS has been unclear on how it treats staking gains, essentially taxing them as soon as they’re realized, rather than when they’re converted to legal tender.
We can see the inconsistency of this decision when we compare it with other forms of property. Uncle Sam does not tax a person when they turn a blank canvas into a masterpiece. Nor does he tax a person who is building a home when the work is still in progress, but only when the home is sold and the proceeds are collected. Taxing these assets before sale is ridiculous! But this is exactly what the IRS is trying to do with cryptocurrencies.
The White House has proposed shifting to proof-of-stake protocols to reduce the high energy and carbon emissions associated with proof-of-work algorithms. But taxing staking gains will hinder the growth of this movement, as people won’t be willing to stake their cryptocurrencies if they’re taxed before they’re sold.
It’s understandable why the IRS wants to impose taxes, but taxing staking gains upon occurrence is bad policy. It discourages taxpayers from investing in crypto, drives wealth creation and jobs offshore, and violates the Biden administration’s clear policy on climate change. It’s crucial that the IRS defers taxation of staking gains until the moment of their sale or exchange. This won’t cost the government anything, and it’s consistent with the taxation of other assets. If the IRS doesn’t change its stance, Congress should act to clarify the law and prevent this kind of taxation.
Investors also need to be aware of the taxes that are due on cryptocurrency. Taxpayers must report their moves when filing their federal income tax and must submit their returns before April 15th. Failing to comply with the IRS’ rules could lead to criminal investigation and heavy fines. Taxpayers should leverage strategies such as tax loss harvesting and seek the help of professionals if necessary.
The IRS’ stance on staking gains is at odds with the Biden administration’s policies for fighting climate change and onshoring jobs. Taxing these gains will stifle the growth of proof-of-stake protocols, which depend on crypto owners being able to reap rewards without obstacles. The IRS and the Biden administration should be prioritizing the interest of taxpayers and of the environment over their own, and they should ensure that taxation of staking gains is fair and incentivizes the development of proof-of-stake networks.