Notes on IRS Staking Revenue Rec
Back with a Crypto note.
Hi there,
Here are some thoughts from my profession around crypto - this time its around revenue recognition on staking rewards. This is not considered financial advice in anyway; simply what I’ve been able to determine at this time.
But before that, what am I up to?
I’m currently in Madrid, Spain. Trying the European Working life where for the week, I work in Spain with a mix of Euro and US hours.
Why Madrid? Madrid is a very livable and easy city to exist in. It is by no mean a city for adventure; wrong city. It is a livable city and gives you greater ease to all things than San Franciso or Manhattan could even do.
Secondly, I have been responding to PBCs which has been a comically fun point in my career. Public accounting people understand.
Plus cash reconciliations, OARs, and IPE. Except I am the one demanding it.
Lastly, I recently finished my new computer build, now using an RTX 4080 and taking only 15L of space (size of PS5). My office is considerably less thermally hot given the upgrades I did and downsizing.
That’s it!
IRS STAKING REVENUE REC
IRS Rev. Rul. 2023-14 came out, and it focuses on the taxation of staking rewards on proof-of-stake blockchains. The TL;DR: Staking rewards are taxable the moment an end user has the ability to claim rewards, regardless of whether they have claimed it or not.
Here’s what that means:
If you are staking 1,000 units worth of Crypto with expected earning rewards daily, as well as being able to claim rewards daily-
Each day is a tax triggering event given that the rewards in this scenario are 1) rewarded daily, and 2) claimable daily.
Thus the value of what is claimable each day, less previously claimable amounts, is your tax bill for the day.
This rev ruling impacts cash-basis tax payers only; corporations that are accrual can disregard it because, well, we were already accounting for this differently anyway.
As for those cash-basis tax payers, it has caused some mayhem:
Panic around the tax amounts around staking rewards
Panic around the frequency of tax events - specifically whether its per epoch/day, or when claimed
Panic around the concept of “Dominion” and “Control”, especially under unique technologically or legal restrictions.
From a cash-basis tax payers point of view:
It is possible to be taxed and not be able to liquidate enough crypto assets to cover the tax bill in fiat
Depending on the amount you stake, you can get wiped out on a phantom bill.
What do I know?
The Argument of Exchangeability: I’m a fan of the argument that taxation should occur in crypto at the moment of exchangeability. We can define exchangeability as the ability to take a token and liquidate at an offramp or exchange fairly quickly. If you can earn tokens via staking, and sell it off without any technological restrictions, congratulations you get the benefit of a tax event just like the rest of us earning yields on money market funds and high yield savings.
If the tokens you earn that are claimable are freely exchangeable, they qualify for brute tax treatment. Have fun.
Understanding Claimability: Claimability can be defined as when you are freely able to get the tokens and not be subject to a technological level lock up that would effectively not allow you to transfer the tokens and liquidate into fiat. If you have a lock-up period as enforce by a protocol, smart contract, or technology, congratulations this IRS Staking Revenue isn’t your problem today. It’ll be your problem when you can actually click “claim” AND initiate a transfer outside. This is my fairly simple take on dominion and control confusion.
Deferral Strategies: I have observed that there are three POVs people fall into when it comes to taxes:
I want to pay taxes today (and overpay)
I want to never pay taxes (and evade)
I want to defer taxes (and wait for certainty, or definition)
In a regulatory environment that is uncertain and broadly ill defined (Crypto), it’s probably better to look at tax deferral strategies, tax reserves, and arguable positions. At least for corporations. As an individual - well it depends how much money in this pot you got.