Staking gains shouldn’t be taxed until they’re sold

Staking gains should not be treated as a taxable event. It only makes sense to tax such gains upon their conversion to legal tender currency. To do otherwise undermines a marquee environmental policy from the administration of United States President Joe Biden.

The Internal Revenue Service appears strongly inclined to treat staking gains as immediate income. The penalties for getting sideways with the IRS can be draconian. And taxing, or threatening to tax, staking gains is bad policy — and, ahem, bad politics.

There are many excellent reasons not to treat staking gains in and of themselves as taxable events. The best reason is to put the IRS back in line with White House environmental policy to fight climate change.

If the IRS won’t administratively comply with the Biden administration’s clearly stated marquee policy, it’s time for Congress to clarify the law and prohibit the taxing of unrealized gains.

Related: Biden is hiring 87,000 new IRS agents — and they’re coming for you

Deferring gains until sale merely defers receipt of taxes by the Treasury. It doesn’t cost the government even one thin satoshi. So, what’s going on?

Crypto is legitimately subject to taxes in many ways. You’ll pay taxes when you sell your crypto, or even exchange it for other forms of crypto. (Elsewhere, we have called upon Congress to enact a deferral for crypto-to-crypto exchanges, a subject beyond the scope of this article.)

Taxing staking gains is antithetical to a clearly expressed marquee White House policy. It’s also antithetical to generally accepted notions of good tax policy.

Uncle Sam does not tax Jasper Johns while turning a blank canvas into a multimillion-dollar artwork. He is not taxed when he consigns it to a gallery for sale at a posted price. He gets taxed when he is given the million-dollar check for his latest masterpiece.

This obviously makes sense. Uncle Sam won’t take a piece of a painting (or even a fractional interest therein) in payment of taxes. How would an artist be expected to pay the tax on a work-in-progress or a work merely listed for sale? Taxing artworks during their creation would be ridiculous!

Uncle Sam does not tax a building contractor while building a home, nor even when he turns it over to a realtor for sale. The IRS collects taxes upon sale.

This obviously makes sense. One can only guess at an asset’s value until it’s sold, and even then, one doesn’t have the cash to pay the taxes until sale proceeds are received….