The current IRS crypto tax laws in the US are notorious for not being crypto-friendly and if you are a frequent user, it is a hassle to keep track of all your records.
This is especially true for those who mine or stake cryptocurrency, as they receive a reward for their participation in the protocol.
The Current IRS Crypto Tax System
The current system according to the IRS reads that when a user successfully mines virtual currency, it creates a taxable event, and whatever the mined value of the coin is must be incorporated in the taxpayer’s gross income.
This also means that whenever you sell the crypto that you mined, it creates a second taxable event that you must pay based on the cost basis of the value it was mined at.
For example, Alice mined a token valued at $5. Alice must pay the taxes on those $5 mined and when Alice sells that exact token at $8 due to the rise in price.
Alice has to pay taxes on the $3 dollar gains due to $5 being the cost basis.
Coins received from staking should be treated the same as coins received from mining. You should recognize income equal to the fair market value of the coins on the day you receive them. That income then becomes your basis and your holding period begins when you receive the coins
— Crypto Tax Girl (@CryptoTaxGirl) June 22, 2018
Of course, staking and mining are two different things, but since there is no specific definition of staking within the documentation, taxpayers tend to calculate staking as mining to be on the safe side.
Striving for a better Crypto Tax System
Having this type of system most likely prevents or makes people uninterested in participating.
Thus, a group of congressmen wrote to the IRS stating that “It is important that tax policy does not indirectly dissuade U.S. taxpayers from participating in this promising new technology”.
In addition, the letter also addresses that
“It is possible the taxation of “staking” rewards as income may overstate taxpayers’ actual gains from participating in this new technology. It could also result in a reporting and compliance nightmare, for taxpayers and the Service alike”.
After the letter was sent, there have not been any proposals by the IRS nor a response to how they will tackle the staking aspect.
With the current US presidential election taking the top priority, we will not likely know what the future holds until after this 2020 election.
If the IRS is able to reduce the current system from 2 taxable events to 1 taxable event where the user only has to pay taxes whenever they sell their crypto gained from staking, it may make participation and reporting cost easier.