The Internal Revenue Service (IRS) has expanded its tax rules to accommodate its cryptocurrency agenda. In the history of taxation, pure creation has never been a taxable event. However, the IRS tried to tax the new token as income when it was created. This violates traditional taxation principles and is problematic for a variety of reasons.
In 2014, the U.S. Internal Revenue Service stated in the FAQ in the IRS Announcement 2014-21 that mining activities will result In total taxable income. It is important to note that IRS notifications are only guidelines, not laws. The IRS concluded that mining is a trade or business, and the fair market value of the mined coins is immediately taxed as ordinary income and subject to self-employment tax (an additional 15.3%). However, this guide is limited to Proof of Work (PoW) miners and was only released in 2014-long before staking became mainstream. Its applicability to staking is particularly misleading and inapplicable.
A newly filed lawsuit is ongoing in the federal court of Tennessee challenge The IRS taxed their creative awards. The plaintiff Joshua Jarrett participated in the pledge of the Tezos blockchain-his Tezos (Xinxin District) And contribute his computing power. A new block was created on the Tezos blockchain and a new Tezos was created for Jarrett. The IRS taxed Jarrett’s newly created tokens as taxable gross income based on the fair market value of the new Tezos tokens. Jarrett’s lawyers correctly pointed out that the newly created property is not a taxable event. In other words, the new property (here, the newly created Tezos token) is only taxed when it is sold or exchanged. Jarrett is supported by the Proof of Stake Alliance, and the IRS has not yet responded to Jarrett’s complaint.
In the history of American income tax, newly created property has never been taxable income. If the baker bake the cake, it is not taxed when it is baked, but it is taxed when it is sold in the bakery. When farmers plant new crops, they are not taxed when they are harvested, but are taxed when they are sold on the market. When a painter draws a new portrait, no tax is levied when it is completed, and tax is levied when it is sold in the gallery. The same is true for newly created tokens. They are not taxed when they are created, they should only be taxed when they are sold or exchanged.
Cryptocurrency is a new thing, and with it comes many evolving terms. Although it is common to refer to newly created token blocks as “rewards”, this is a misnomer and can be misleading. Calling something a reward indicates that someone paid for it, which sounds a lot like taxable income. In fact, no one pays new tokens to the pledger-this is new. On the contrary, mortgages will produce real newly created property.
Some people believe that new tokens are taxable (at the time of creation) because there is a mature market whose value can be immediately quantified. In other words, they believe that the baker’s cake is not taxed when it is made, because there is no fixed market price to determine the value of the cake. It is true that Tezos tokens have a direct market value, but even this fact should be put in context: prices may vary from market to market, and not everyone has access to all markets. But the existence of market prices usually applies to new properties—not just to standardized or commodity products. If the criterion is whether there is an identifiable market value, then other newly created properties are indeed taxable, including unique properties. When Andy Warhol completes a painting, his work has market value; every brush of his has value. However, his paintings are not taxed on creation. Newly created property-under any circumstances-does not require taxation, not because its value may be uncertain, but because it is not yet income. Cryptocurrencies should be treated the same.
Other analogies with traditional taxation principles are wrong, they simply do not match. For example, staking rewards are not like stock dividends.Internal Revenue Service status In its No. 404 Dividend Theme, “Dividends are the distribution of property that the company pays to you if you own shares in the company.” Therefore, dividends are a form of payment derived from the source—the company creates dividends. In addition, the dividend comes from the company’s profits and earnings. For newly created tokens, this is not the case. For newly created properties—like those mortgaged—no one else initiates payments, and of course there are no payments that depend on profits and gains.
Finally, the IRS’s position is unrealistic and exaggerates revenue. Pledge rewards are continuously created, and user participation is high.For Cardano Have With XNZ, more than three-quarters of users have pledged tokens. Within the scope of cryptocurrency bets, the pace of newly created tokens is shocking. In some cases, the creation of new tokens takes place every minute and every second. For cryptocurrency taxpayers, this can result in hundreds of taxable events each year. Not to mention the burden of matching these hundreds of events with historical fair market spot prices in a volatile market. Such requirements are unsustainable for taxpayers and the IRS. Ultimately, taxing new tokens as income will lead to excessive taxation, because new tokens dilute the value of existing tokens.This is a dilution issue, which means that if the new token tax As with income, stakeholders will pay taxes based on statements that clearly exaggerate their economic benefits.
The U.S. Internal Revenue Service’s enthusiasm for the taxation of cryptocurrencies has promoted inconsistent application of tax laws. Cryptocurrency is property used for taxation purposes, and the IRS cannot separately classify it as unfair treatment. It must be treated like other types of property (such as a baker’s cake, a farmer’s crop, or a painter’s artwork). It shouldn’t matter that the property itself is a cryptocurrency. The IRS seems to be blinded by its own enthusiasm, so we must advocate tax fairness.
This article is for general reference only, and should not and should not be regarded as legal advice.
The views, thoughts, and opinions expressed here are only those of the author, and do not necessarily reflect or represent the views and opinions of Cointelegraph.
Jason Morton Practices in North Carolina and Virginia, and is a partner of Webb & Morton PLLC. He is also a judge advocate for the Army National Guard. Jason focuses on tax defense and tax litigation (domestic and foreign), estate planning, commercial law, asset protection and cryptocurrency taxation. He studied blockchain at the University of California, Berkeley, and law at the University of Dayton and George Washington University.