As the world becomes increasingly aware of the impact of climate change, there has been a push towards eco-friendly practices across all industries, including the crypto industry. Among the measures being taken to reduce carbon emissions is the move towards proof-of-stake (PoS) networks, which are more energy-efficient than proof-of-work (PoW) networks. However, the Internal Revenue Service’s (IRS) treatment of staking gains as taxable income is counterproductive to this effort.
Staking is the process in which an individual holds cryptocurrencies in a specialized wallet and participates in the network’s consensus algorithm by verifying transactions and validating blocks. In exchange for their services, they receive staking rewards or gains. The IRS sees staking rewards as taxable income, even if the cryptocurrency isn’t sold or converted into another asset. This treatment is problematic as it negatively affects the move towards a PoS network, which is regarded as more environmentally friendly than PoW networks.
The Biden administration has made climate change a priority, and a move towards a PoS network aligns with this directive. However, the IRS’s approach contradicts this goal by taxing staking gains as income. The IRS’s move causes Americans to lose out on income while driving wealth creation and employment opportunities offshore, against stated presidential policy.
One of the reasons staking gains are not ideal for taxation is that their value fluctuates significantly until they’re sold or converted. Taxing staking gains from the onset is also problematic because it means that individuals will have to pay taxes on unrealized gains, which is similar to taxing a painter on an unfinished artwork. Additionally, many taxpayers often lack the cash to pay for their taxes until they realize profits from sales.
Not taxing staking profits is not only beneficial for the environment but also for the crypto industry. It creates a conducive environment for entrepreneurs to grow their businesses, create job opportunities, and increase revenue for the US economy. Taxing staking gains as income would cripple the industry, undermining the efforts of the Biden administration to reduce carbon emissions and create employment opportunities for Americans.
Congress needs to step in and clarify the law, prohibiting the IRS from taxing unrealized staking gains as income. This move will align the IRS with the White House’s environmental policy and protect Americans from excessive taxation. Ultimately, not treating staking gains as taxable events will lead to a thriving industry that fosters innovation and benefits the US economy as a whole.
