U.S. President Donald Trump delivers the State of the Union address
U.S. President Donald Trump delivers the State of the Union address to a joint session of the U.S. Congress on Capitol Hill on Feb. 4, 2020. Yuri Gripas/Abaca Press

On August 29, the Congressional Blockchain Caucus’ co-chairs David Schweikert (R-Ariz.), Bill Foster (D-Ill.), Tom Emmer (R-Minn.), and Darren Soto (D-Fla.) signed a letter, proposing to tax staking tokens on proof-of-stake blockchains only after they are sold.

According to the letter, the current collecting processes could be detrimental for staking third-parties as they can overstate their gains from participating in this new technology. In proof-of-stake protocols, providers who assist in validating transactions create new blocks and tokens on the blockchain, which most of the time end up being held by them.

With the current taxation law, each block could be treated as an independent taxable event, possibly resulting in hundreds such events every year and creating a “reporting and compliance nightmare” for both taxpayers and the government.

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“These third-parties work to simplify the technical processes and we believe that taxpayer’s true gains from these tokens should indeed be taxed. However, it is possible the taxation of “staking” rewards as income may overstate taxpayers’ actual gains from participating in this new technology.”

In the letter, the four members of Congress offer a new solution to this problem by proposing that these tokens should be treated as all other forms of taxpayer-created property – such as crops, minerals, livestock, artworks, etc. This will allow for safeguards and ensure that the technology will continue developing in the United States.

Shehan Chandrasekera, Cointracker head of tax strategy, put forward a different perspective on the matter:

“Technically speaking, staking income is similar to rental income. This is because cryptocurrencies are treated as property. Income you get after lending property is rental income by default,” he said.

According to experts, treating staking as a source of income may not be correct since validators do not get paid, per se, to create blocks. This way, their activity cannot be described as a source of income and thus they should not be taxed in such a manner. Current tax laws allow for various misconceptions and metaphors, creating many technical complications for staking providers. The IRS has yet to release any information about how and when staking will be taxed.

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