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IRS Favors Proof-of-Stake with a Tax Boost

By:
Bob Mason
Updated: Feb 3, 2022, 03:58 GMT+00:00

Proof-of-Stake gets a nod from the IRS, while Bitcoin's Proof-of-Work protocol sits out in the cold.

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Digital assets and tax have been a hot topic at the start of the month. Increased chatter comes as the current tax year comes to an end. Authorities will be looking to provide clarity to crypto market participants.

While governments may take different paths on taxation, the prospects of a global crypto regulatory framework remain high. This could become all the more important should jurisdictional variations in tax codes present tax arbitrage opportunities.

As tax codes diverge geographically, we have also seen lawmakers make distinctions between crypto protocols.

U.S Lawmakers Favor Proof-of-Stake over Proof-of-Work

In late January, a U.S Congress sub-committee held a hearing on crypto mining and the impact to the environment. While political gamesmanship was evident throughout, lawmakers appeared to be aligned on one major issue. Lawmakers perceived Proof-of-Stake (PoS) protocols to be more environmentally friendly than Proof-of-Work (PoW) protocols.

It was a David and Goliath moment, with the hearing becoming a battle of PoS miners versus Bitcoin (BTC) miners. Since the much-touted hearing that delivered very little in terms of substance, new research has also hit the wires.

This week, CoinShares published a paper on Bitcoin mining and its energy and carbon impact. Statistics presented by the CoinShares publication painted a vastly different picture to those provided by the University of Cambridge and last month’s sub-committee hearing.

CoinShares research showed that Bitcoin mining accounted for less than 0.08% (39 Mt) of total carbon emissions (49,360 Mt) in 2021. According to the research, the global banking system had higher carbon emissions of 130 Mt annually. By contrast, the U.S subcommittee hearing briefing memorandum had ETH and BTC mining CO2 emissions at the equivalent of 15.5m gasoline powered cars on the road. The memorandum had Bitcoin mining accounting for 90% of the total.

According to the Environmental Protection Agency (EPA), “a typical passenger vehicle emits about 4.6 Mt of CO2 per year. That would translate into 64 Mt of CO2 emissions each year, almost double that of the CoinShares number.

Investors Question SEC Case Against Ripple Lab

Such were the differences that it raises questions over the stance of lawmakers on Bitcoin and Proof-of-Stake mining. Further questions are likely when considering the SEC vs Ripple Lab case (XRP). Since the SEC lawsuit, two actions have been taken against SEC. In late December, Empower Oversight filed a lawsuit claiming conflict of interest, favoring Ripple Lab. This week, news hit the wires of non-U.S XRP holders signing a petition, demanding for an investigation into the SEC’s actions against Ripple Lab.

Similarly to the Empower Oversight claim, the petition claims that “the SEC enforcement actions on cryptocurrencies have involved the appearance of improper ties and conflicts of interest among officials, and should be investigated”. Importantly, the petition also points out that petition attorney John Deaton “has compiled evidence that SEC officials may have colluded with outside parties to regulate cryptocurrencies in line with their personal financial interests”.

When considering the stance of U.S lawmakers on Bitcoin mining and  the alternatives, other moves against Proof-of-Work protocols are likely to raise eyebrows.

Inland Revenue Services Dishes Up Some Good News

Overnight, news hit the wires of the U.S tax authority, the IRS, announcing that “untraded tokens are tax-free”. For the crypto market, this means that crypto stakers and miners don’t get taxed on unsold proof-of stake tokens. According to the report, the IRS refunded a couple in Nashville with taxes on rewards gained that related to unsold Tezos (XTX) tokens.

The judgement could mean that revenue streams from Proof-of-Stake mining and crypto staking are not taxable incomes. Official court filings are reportedly due to be made public later today. The filings could provide some rationale behind the decision. One reasoning could be that lawmakers favor Proof-of-Stake over Proof-of-Work protocols due to environmental issues. At this juncture, Bitcoin miners may be feeling more aggrieved following the sub-committee hearing.

About the Author

Bob Masonauthor

With over 20 years of experience in the finance industry, Bob has been managing regional teams across Europe and Asia and focusing on analytics across both corporate and financial institutions. Currently he is covering developments relating to the financial markets, including currencies, commodities, alternative asset classes, and global equities.

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