Income Tax Complexities for Proof of Stake Rewards

Abstract

This paper outlines the key complexities in applying traditional tax principles to proof of stake – or staking – rewards. How staking activities and rewards are characterised is fundamental to determine how a jurisdictions tax rules will ultimately apply. Core issues for taxing staking rewards surround arguments around four key interrelated themes: (i) dilution and realisation (ii) passivity and the performance of services (iii) validators and delegators and (iv) minting new tokens and transaction fees. This paper presents an exploration of some of the key tax principles relevant to staking rewards, drawing on legislation, precedent and guidance across Australia and the United States of America to exemplify the challenges therein. In doing so, this paper examines the role of the staker, the theoretical diluting effect of minting staking rewards, income characterisation and the challenges of residency and source. Such considerations highlight that the bespoke, decentralised nature of staking means that jurisdictional claims and overlaps will challenge taxpayers and tax authorities in the tax compliance function.