PoS income taxation


#1

Here is an article that explores potential ways how Proof of Stake income could be taxed. The author uses great analogues that will help people new to the space as well as tax professionals looking to expand their knowledge.
Staking Out New Territory: Taxation of Proof-of-Stake Protocols


#2

I’d guess the best/safest for any delegators/validators wanting to avoid tax is either:

  1. to generate and receive any staking returns in a jurisdiction where they reside without income tax for residents
  2. or to earn any staking returns classed as income in a jurisdiction where they don’t reside that doesn’t tax non-residents on locally sourced income and to reside (for tax purposes) in a jurisdiction where foreign sourced income is not taxed…

(If you have US nationality, and this article focusses on the US system, this won’t help you - as they tax you wherever you live.)

Have a read and check the list here: https://en.wikipedia.org/wiki/International_taxation#Taxation_systems

Maybe something for PoS service biz to consider…


#3

@Mira Let’s invite someone from https://www.proofofstakealliance.com/

To comment here :+1:


#4

I spoke with a friend/mentor at the AICPA not too long ago on the subject. If we are lucky, POS income may be treated similarly to income from a rental property. At least from the perspective of a delegate/validator. This makes sense to certain degree.

The effects of such things as suspended passive losses, depreciation deductions, like-kind exchanges (switching from one pos network to another), etc., are far more appealing than those of other potential avenues of taxation. I would very much be opposed to a validator being classified as a pooled investment vehicle or any other entity under the jurisdiction of the SEC, CFTC, FINRA.

Of course, if one is simply delegating tokens, not within the jurisdiction of the US, or aiming to avoid paying taxes at all then much of this is irrelevant. For everyone else, it is probably worth looking into the pros and cons in more depth.


#5

From Andrew at Figment (cc: @Ether_Gavin) in the Cosmos Watercooler chat, posted in response to another validator mentioning they sell enough atoms regularly to cover taxes. I asked that validator to share their formula. This is Andrew’s response, which the other validator pointed me to.

You pay taxes on fiat profits (simplified to income - expenses). You usually pay taxes once/year or once/quarter.

The challenge is when earn income in something volatile like an Atom. You could earn 10 Atoms today and their price is say $5. So for today you’d say you have $50 in income. But tmrw say the Atom price goes to $1. You still have $50 in income but only $10 worth of Atoms.

One idea for daily selling might be:

  1. Add up your monthly expenses (likely servers + salaries)
  2. Each day of the month track your income and on the day total income > monthly expenses (aka starting to turn a profit in that month) start selling daily income at your tax rate (maybe 25%-35% depending on your corporate structure).

If being cautious, you could simplify all this just to sell 30%/day and likely be safe. True up at the end of the month. Also depends on your treasury management strategy.


#6

I run a company registered in Romania and I can say that here there is no taxation if you keep all your earnings in crypto. The taxation only happens when you exchange from crypto to FIAT and based on the company type the tax levels can go down to 1% from the income if you withdraw less than 1 mil EURO/year.

Also I have companies registered in Switzerland but there the taxation is not so friendly.

Discussing on taxation at global level is pretty tricky as every jurisdiction has his own particularities and tax optimisation procedures.


#7

One of the challenge with the taxation is to define a “fair” salary for the node operator that wouldn’t be questioned by IRS.


#8

This is something I’ve been thinking about too @Mira. I have a couple calls scheduled this week that may help and will post updates from them here.


#9

This is a helpful thread on the Cosmos forum. It provides another input to think about regarding taxes.

“When a delegator receives staking rewards, this will probably be seen by tax authorities as income. In reality though, the delegator is simply maintaining their financial position in the system, as their tokens are being inflated along with everyone else. Unless this is dealt with somehow, it will result in the system leaking value out to taxes at a compounding rate. There’s a good thread about this possibility here:”

https://twitter.com/ceterispar1bus/status/1113116321925877760


#10

Here’s another insightful post -


#11

I agree this is this makes the most sense given the current environment. We shall see though if the upcoming guidance from the IRS changes this.


#12

I originally made the thread about burning unstaked tokens as an alternative to staking rewards, but I’ve somewhat changed my position. I think that it’s just going to be too confusing for people if unstaked tokens weirdly decay. Unfortunately this does put wealthy companies and individuals who can afford sophisticated tax strategies at an advantage in the network.

I think @sunnya97 presented at the Berlin Hackatom about some kind of staking derivative that could help with this issue.


#13

Are there any SaaS that have clearly considered tax implications when locating their biz? Ie. any SaaS setup in tax free/friendly jurisdictions for res/non-residents?