The Blockchain Association is pleased to launch the Staking Working Group to educate the policymaking community about proof-of-stake (PoS) networks, and the legal and regulatory issues with particular effect on PoS networks. The working group’s co-chairs will be Katie Biber, General Counsel at Anchorage; Matt Perona, Chief Operating Officer at Polychain; and Rachel Nelson, Senior Director, Associate General Counsel — Regulatory at Coinbase.
Open blockchain networks have different ways of ensuring their shared ledgers are accurate. Many of these consensus mechanisms reward network members with new tokens in exchange for helping to maintain the ledger by validating new batches (or “blocks”) of ledger transactions. One increasingly popular consensus mechanism is “proof-of-stake.”
In a proof-of-stake-network, members “stake” their own tokens for the chance to validate a new block of transactions. The member’s odds of being chosen to validate a new block are proportional to the amount staked. Once a block is validated, the chosen member receives a distribution of new tokens from the network, in addition to the originally staked tokens. (If the block is found to be invalid, or if the chosen member acts maliciously, the staked amount may be partially or fully forfeited.)
One issue of particular importance to proof-of-stake cryptocurrency networks is the proper tax treatment of these newly created tokens.
Current Treasury guidance suggests that these new tokens be taxed as gross income. However, this tax treatment fails to account for (1) newly created tokens’ inflationary effect that partially offsets any gains from participating in network maintenance, (2) the administrative burden of accounting for taxable events each time tokens are created (some networks create tokens every few seconds), and (3) the true nature of these decentralized systems, wherein the new tokens only exist because they were created through the efforts of the individuals running the protocol software and contributing to the network.
Instead, we believe that reward tokens should be treated as created property and taxed when they are sold or exchanged. This taxation method will ensure the fair market valuation and equitable taxation of all tokens and reduce administrative burdens.
The Staking Working Group will spearhead industry efforts to bring legal and regulatory clarity to issues of particular importance to PoS networks and coordinate educational opportunities for the policymaking community. The working group’s efforts will do much to advance the Blockchain Association’s goal to shape smart policy that will catalyze blockchain and crypto entrepreneurship and innovation in the United States.