US Library of Congress report highlights proof-of-stake tax blindspot

The taxman still isn’t wise to cryptocurrency earnings made through proof-of-stake. But that could change soon.

Republican Representative Tom Emmer has called for more precise tax guidelines regarding cryptocurrency earnings, after a report he commissioned from the Law Library of Congress showed a stark disparity between regulatory approaches taken by various tax authorities around the world.

The 128-page study examined cryptocurrency tax laws in 31 nations, paying particular interest to their application concerning coins and tokens earned through mining and staking. As the report notes, many countries have already established specific rules for coins earned through mining, but only five have laid down any guidance for would-be stakers.

Of the 31 jurisdictions included in the study, only Australia, Switzerland, Finland, New Zealand and Norway were found to have addressed tax rules in regard to staking.

Proof-of-stake (PoS) is a consensus mechanism used by many blockchains as an alternative to the more energy-intensive proof-of-work pioneered by Bitcoin (BTC). The process is analogous to crypto mining, but instead of trying to amass the most computing power, PoS sees people “stake” their coins on the blockchain in return for a proportional share of the block rewards.

The report also detailed tax guidance surrounding coins gained through airdrops and hardforks, where tokens are either given away for free, or created as the result of the birth of a new blockchain. Only six countries mention airdrops or hardforks in their national tax guidelines: Finland, Japan, New Zealand, Australia, Singapore, and the United Kingdom.

Emmer said clearer guidance was needed from the Internal Revenue Service to avoid stifling technological innovation in the United States:

“In order for these technologies to thrive and reach their revolutionary potential, we must have the knowledge and organizational landscape of the approaches to regulation to best implement the proper path forward that will not stifle this innovation. We can improve the clarity of IRS taxation while at the same time ensuring these taxes are sensibly applied.”

Abraham Sutherland, legal advisor to the Proof-of-Stake Alliance, said a logical first step was to tax the sale of tokens gained through staking, not their initial acquisition. 

“The critical first step is to clearly establish that block rewards are taxed when the new tokens are sold, like all other new property, and not when they are first acquired. This will both reduce administrative headaches and ensure that people are not overtaxed,” Sutherland said.