Thread by @Santiag78758327

A Thread on the Tax Treatments of Staking & DeFi
1/ There are many digital asset projects whose L1 offers a native digital asset to reflect utility, governance, assignment of ownership, etc. From a tax implication standpoint the main view has been primarily establishing basis.

2/ Some of the projects require that you own the digital asset in order to stake it against some network function (like committing compute resources, or having a vote on governance, etc.). The claim is typically security as a game theory solution. OK.

3/ DA creation occurs in the networks via mining (PoW), an airdrop (pre-mine), or via algorithmic interest (auto-inflation in the code). All of the above then have a secondary market of exchanges in which you can purchase the DAs brought into existence by the aforementioned.

4/ So you have 2 ways in which market participants can establish a tax basis for compliance w/ the IRS (speaking US markets only). Participate in the creation events OR buy/sell on exchanges. Things get really ugly / complex when you start mixing these 2 processes.

5/ If I'm a business that relies on others to stake their DA's towards my efforts (let's say it's a delegated network function), "others" are essentially providing a service to me. The incentive for them to do so might be a tangible value (DA % return) or intangible value (vote).

6/ If I transfer value to the delegators via a network function, or even an external function (like an exchange) I need to establish a cost basis for that transfer at the time of transfer. I also need to track how much accumulated value has been transferred in a tax year.

7/ If a delegator is rewarded by my company in exchange for services rendered in excess of a pre-determined IRS threshold I am obligated to issue a 1099 form reporting that an individual has received this value from me. Typically it's $600 / yr. What do I use as identity?

8/ This is problematic on several fronts. People receiving DAs from DeFi instruments have to declare those gains to the IRS or risk non-compliance & also need to track the $ equivalent tax basis on an ongoing basis (IRS doesn't care how many ETH you made, just $).

9/ Even more problematic is that the instruments paying out the gains to delegators or DeFi participants need to know to whom they are transferring value if thresholds are exceeded! This is widely ignored. How will this work if a process is coded by a DAO? Who sets the threshold?

10/ Who collects the identity data of DeFi participants to ensure they are properly reporting payouts to the IRS, especially if the construction of the financial instrument is for the benefit of a specific common enterprise (not talking securities arguments, just group of coders)

11/ With the VASP rule exchanges will have to report to the IRS the amount of payouts to exchange users in a fiscal yr. The IRS in turn will audit users on to what their tax basis was for that sale (a non-trivial determination). Next they'll ask where the interest comes from.

12/ The overall point of this thread is that the IRS will work it's way through the value stack to the root of value creation (PoW, pre-mine, algo. interest, etc.) to get to a proper tax basis so that all involved in the chain are held to account. This is not being considered now

13/ My advice is to treat every transaction in the digital asset space as having an implication on both the creation side and the exchange side, and make sure that you acknowledge that nothing is free nor is anything long for this world that evades taxation.