Battling The IRS: Is Staking a Tax Loophole?

IRS and Crypto Staking Tax loopholes
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It’s no secret that cryptocurrencies have gained a massive amount of global attention in such a short period of time. Yet, like any new technology, many government entities do not know how to manage and regulate them.

One such country is the United States. On Wednesday, May 26, a Nashville, Tennessee couple filed a lawsuit against the IRS demanding that the agency return thousands of dollars they paid to them as a result of staking on the Tezos blockchain.

How Is Crypto Taxed In The US?

Things should seem relatively simple as virtual currencies are taxed as property or investment when they are sold. However, when someone uses them to buy something, that counts as if they were selling them. 

Here’s the bad news: Few of us are aware that the Internal Revenue Service (IRS) is prepared to seize the coins from users who have not sent in their overdue tax debts. Even when one is paid for work through cryptocurrencies, it’s computed as a taxable income. In other words, almost all crypto transactions can be taxable and must be reported.

So far, so good right? Or so we thought. Because there is a problem that arises with alternative ways of obtaining cryptocurrencies. Yes, we are talking about staking.

Staking: The Start Of The Fight

Staking is the act of locking in our cryptocurrencies to receive profits or rewards from them. When staking, the balances are inaccessible and cannot be used freely. These tokens contribute to the operation and functioning of their blockchain.

This is where the Nashville couple’s fight begins. They claim that the stake coins are not taxable until traded. That is, when they become property, not before. They assert that no law allows these assets to be treated as income. The couple is therefore seeking a refund of income tax paid of about $3,293 in 2019. In addition, they are also demanding an increase of $500 in income loss tax credit.

A Loophole Regarding Crypto-Taxes

The truth is that this is uncharted legal territory as the IRS Revenue Code does not cover how cryptocurrencies should be treated. That’s why this lawsuit is so important as it could set a precedent, one that forces the IRS to check its current regulations on cryptocurrencies and their variants.

It is impossible to know at this point if the lawsuit will go in the couple’s favor. Yet, they have the support of the Proof of Stake Alliance (POSA) which decided to back the lawsuit. The belief here is that the improper tax treatment of new tokens will hurt the blockchain industry as a whole.

To sum everything up, this lawsuit marks a before and after in the way in which staked coins are being taxed. This situation – once again – shows the importance of the IRS creating a precise regulation. Specifically, the taxation of cryptocurrency assets, POS, and staked coins need to be clarified.

Hopefully, situations like this one will bring more awareness of how to tax digital assets moving forward. This should also help the IRS as the agency needs to engage in further study around how cryptocurrencies work so that they can create proper regulations.

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