Legal Precedent? IRS Will Not Tax Unsold Tokens?

in #hive-1679223 years ago

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https://www.forbes.com/sites/kamranrosen/2022/02/02/in-huge-precedent-irs-says-it-will-not-tax-unsold-staked-crypto/

https://bitcoinist.com/irs-will-not-tax-unsold-staked-crypto-as-income/

https://cryptopotato.com/after-a-court-battle-the-irs-might-not-impose-income-taxes-on-unsold-staked-crypto/

It's pretty crazy how much I've been talking about taxes lately, only to be hit with this bombshell in my news feed last night.

According to a Forbes report on Thursday, the IRS noted that it will refund the $3,293 in income tax and statutory interest the couple paid on their staked 8,876 Tezos (XTZ) tokens.

In the court filing, the Jaretts noted that tokens obtained through proof-of-stake protocols should be considered “new property” created by the taxpayer, not as income. Therefore, this new property should not be taxed until it is sold or exchanged for a “readily accessible form of wealth.”

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This is pretty huge...

Up until now, the IRS has tried to have their cake and eat it too. They classify crypto as property, but then try to act like the property is income. As I have written about this previously a few times: that it is ridiculous and a strategy doomed to fail in all ways imaginable.

  • Low Liquidity prevents crypto from being taxed as income.
  • High Volatility prevents crypto from being taxed as income.
  • Extreme security risks prevent crypto from being taxed as income.
    • Rugpull / Hacker / Exploit / Phishing / Cryptojacking / ETC
  • Also credible lies prevent crypto from being taxed as income.
    • "I lost it in a boating accident."
    • "I lost the keys."
    • Because the lie is credible it could also be truth.

However, this move to tax crypto as “new property created by the taxpayer" makes a ton of sense and provides greatly needed regulatory clarity. This move makes my White Elephant Airdrop Attack completely null and void. Under a law like this airdrops would not be taxed until they are sold, and no longer would the IRS be assuming that all crypto markets have infinite liquidity, which is how the exploit occurs.

Don't quote me on this, but I've also read that there is no "like-kind" clarity in place for crypto either. Therefore, when transferring one crypto for another, this is technically a taxable event that needs to be logged, but that taxable event doesn't actually need to be paid until the "property" we bought with the "property" is realized as USD or another asset with better liquidity / known value.

A like-kind exchange under United States tax law, also known as a 1031 exchange, is a transaction or series of transactions that allows for the disposal of an asset and the acquisition of another replacement asset without generating a current tax liability from the sale of the first asset.

For example, if you traded a house for another house, technically you don't know what either house is worth. Therefore, how can it be taxed? However, I believe there are like "like-kind" laws in place for situations like this that allow the taxes to be deferred until the actual value can be more accurately calculated. At least that's my understanding. I read it one a website that doesn't have a ton of credibility and it was a little confusing. I dun know man, go ask @nealmcspadden he knows all this stuff.

What is certain is that taxing crypto is an issue that is extremely vague and up for debate on many fronts. The possible precedent being set by this case could not only benefit everyone in crypto but also simply make the law a little bit less vague, which is good either way.

However, according to confidential sources familiar with the matter, the Jaretts intend to pursue the case further in court to enable them to obtain long-term protection.

Most news outlets are reporting this case as an automatic victory and that legal precedence has already been 100% confirmed. Obviously when we dig deeper into the facts even the couple that started the lawsuit is pushing for long-term protection, not a one-off victory over a couple thousand dollars. So don't be assuming that this "law" is set in stone. It's just the outcome of a single court case so far.

But like I've said many times, the court cases involving crypto are just going to get weirder and weirder over the next decade. Trust me: we are going to see some crazy stuff. There's no way around it because the legal system is not going to be able to navigate money as technology that evolves exponentially. Government is slow, and crypto is fast.

This move by the couple might set a precedent for anyone who wishes to profit from the rapidly growing cryptocurrency staking industry, which is currently estimated to be worth over $18 billion.

Conclusion

This small court case could have huge ramifications when it comes to taxing crypto. Obviously we should all be pushing for cryptocurrency to be classified as currency instead of property, but I'll take what I can get.

Using this precedence in combination with like-kind laws, one could argue that my Taxes and Hyperinflation problem has been solved. We can now compound farm yield pools, and we are creating tax events, but those tax events don't have to be paid off until the property is sold and the value is known. Then if we never sell the property or we just trade it for other properties, the taxes never materialize. Of course to know for sure we'd have to win a court case that proves it, and I'm not that brave so, I'll leave it to someone else :D.

“new property created by the taxpayer"

What this property?
I don't know the value of this property until I sell it.
Classic.

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Interesting with the tax season looming.
This will pave the way for more to hold crypto
long term and sell only in dire situation.

!BEER

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I agree. If this becomes a precedent it alone could incentivize people to hold crypto like Hive.

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so, Celsius issued me a W2, now I wonder how to handle that? Can't wait for more clarity on crypto, IRS / Governments need to wake the fuck up!

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Celsius

Wow... weak :D lol

Wow! I didn’t know they KYC and consider you an employee?

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well, I mistyped, it's actually a 1099-Misc not a W2. But either way since they issued it, it needs to be addressed and then subtracted as gains due to the new ruling. So in essence they should not have issued it.

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Maybe counting crypto assets as property is to get us used to the idea of 'digital property' so we, ya know start saving up for that beach front Pixel pad

Beachfront pixel pad? Sounds pretty cool! I can’t wait to look at the map and see what celebrity I can live next to!
Bragging Rights!

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Hahaha , for an extra fee, we can all live next to an a.i. facsimile of Beyonce and elvis

Paying taxes is immoral

Only because they use the money for atrocity!

This is exactly why. So I suppose its contextual immorality.

Interesting court case, and I agree with you that it’s just the first of many which will occur. I also agree they are just going to get weirder and weirder as time goes on. So you will have many more stories to tell.

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That incredibly interesting and actually very exciting. They are going to keep trying, but eventually that system will crumble because it will not be able to keep up. Plus I am in the camp that if I don't get a W2, they have a special place they can kiss, lol... NOT FINANCIAL ADVISE, lol.

For me, it's not whether they tax or not but what they do with these outrageous taxes is the major concern.

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Hmmmm....nice article.

One of my fears as regards travelling isn't he tax system on crypto.

Taxing crypto is crazy to me. The other day I saw the 30% tax on crypto in India. That's like cutting one's neck off.

Well, lets see how things unveil in the future.

Government is slow, and crypto is fast.

This is one thing I am very sure of. Crypto will move way faster than the government.

Well thought post💪💪

Obviously taxes suck, but I'm mostly worried about being expected to keep tabs on every little micro transaction, and how much something is worth at the time of earning it. It just takes all the excitement out of it and makes the whole thing a headache that is probably one of the biggest things stifling the entire space. There are a ton of ways they could make it more reasonable (even if not ideal), and it sounds like we are moving towards that. I hope this moves develops quickly.

Earned crypto not taxable til exchanged to another crypto (at whatever price it's exchanged at) would even be reasonable enough and make de-fi and hive a whole lot easier to report. Not taxed until exchanged for fiat would be better.

exactly...

Yeah I was overwhelmed by that myself and wondered how far into blockchain explorers they would go!
Hopefully no Sequel query experts work for them ! LOL

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With the addition of MimbleWimble to Litecoin, after accepted, does this make what you wrote here even less impactful?

That said, you are right. This is huge since all staked tokens are not seen as earned income. It only then is claimed at the time of sale.

For the US, the big advantage is that if holding the tokens received as payout for more than a year, it is taxed as capital gains (albeit on a price of $0).

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Taxing on this Crypto currency are bad. As Crypto currency are still gaining ground,the government should stop all this tax.

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That is really interesting. It definitely gives me a little bit of cause to relax on some of my stuff. I have only ever planned on claiming whatever I converted to fiat, I will pay taxes on that no problem. My other stuff... much muddier territory. At least legal precedent is being set. That is good because that was future cases and laws are eventually founded on.

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My thoughts exactly.

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Government don't realise that all they need to do is create individual blockchain wallets and get paid in crypto, and just like that, all their problems solved.

However, there's a better chance of squeezing @lordbutterfly into an elephant's ass than Governments accept that going back to fiat.

Imagine the IRS had a hive wallet that tracked us citizens and made all of you pay from any reward you earn around here. That would be absolutely horrible of course but it actually solves their problem in a very fucked up way 😄

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If the IRS had a Hive wallet, Hive would cease to exist. It would effectively be transformed into FedCoin. At that point, game over, don't collect 200 dollars, and go straight to [Monopoly] jail.

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I don't know much about the taxes thing especially because I don't live in the USA but you're right about one thing for sure: things are going to get full-on weird in the next years.

At this point, I just don't report anything related to crypto and pray lol
Let's see for how long that's going to fly

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It's an interesting court case and I hope they have success when they go further. It would go a long way to set precedence for the court cases going forward.

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ABC presents, "How To Get Away Without Paying Taxes"

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IRS: It's Murder!

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This is a very interesting case, especially for folks around the HIVE chain.

Basically, the decision makes the creation of new coins from other coins (AKA staking inflation) a non-taxable event.

So let's say you take LEO, stake it into LEO Power, then do activities to create and assign new LEO it's not a taxable event until that new LEO is sold for something else. Sounds an awful lot like curation.

Also, the like-kind exchange argument never made any sense at all. In a like-kind exchange a very key element is you don't get to do the transaction or handle the money. On top of that, the Trump tax reform (TCJA) specifically limited like-kind exchanges to real estate only.

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The 1031 Exchange requires you to take proceeds from a smaller asset to put into a larger asset. For example, you sell a single-family home and use the proceeds to buy a small apartment building. Assuming the latter is worth more, you can defer taxes. You can keep doing this as long as the next asset is larger. The problem with crypto is that it's divisible. So, the analogy doesn't hold.

One strategy that is possible is to pile savings into DeFi with the intent of never taking it out. You just continue borrowing and paying off the loan. You would benefit from capital gains without worrying about tax. This is what I have started doing. If I ever pulled out my deposits, I would end up with more than I added. However, as long as I don't withdraw, it continues to compound, increasing my credit line.

The only problem with this approach is if the DeFi platform upgrades or it becomes necessary to withdraw, such as getting hacked. Then, it forces a realization of the gain. Then again, it never gets converted to money.

With that line of thinking, there is no way, for example, for me to convert tMCDAI, tCRO, or tBTC to cash. I would have to convert to Wrapped DAI, WCRO, and WBTC first. Then, I could convert to WUSDC to bridge to the Exchange for USDC. And, finally, turn USDC to fiat. Or, I could convert the DeFi tokens to WBTC, bridge to the exchange, and sell WBTC for fiat. That's a long chain of transactions to realize a value. It's only a rumor of profit before the true profit comes out.

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The only problem with this approach is if the DeFi platform upgrades or it becomes necessary to withdraw, such as getting hacked. Then, it forces a realization of the gain. Then again, it never gets converted to money.

It's not right to be taxed for an event you didn't initiate. If you withdrew your crypto for whatever reason under normal circumstances, then it can be taxed as normal; you chose to cash out, and you knew what the tax penalties were ahead of time.

Crypto withdrawals due to hacking cannot be taxed because the withdrawl (or cashing out) took place without your knowledge, and therefore without your consent. You didn't choose to "withdraw" or "cash out" in this case. In short, the crypto taken out was due to theft. Theft cannot be used as the basis for creating a taxable event.

I used the word "cannot" in the everyday sense of the word, but the legal context may or may not be different. This is up to a top-shelf crypto lawyer to present to the taxing authorities.

Sooner or later, legislation needs to be written and then signed into law which properly and ethically accounts for the hacking situation. If not for those reasons, then it should be included because any of the legislators (not to mention the chief executive and his/her staff) could fall victim to theft by hacking and we know they don't want to be taxed in that event.

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This reminds me of a comment I made a couple of months ago which was about an article at the satire sire Babylon Bee"

This will not happen, but we know these are the people to try it:

Cover Image for "Janet Yellen Proposes Tax On Coins You Acquire In Mario"

I agree that crypto lawsuits will get weirder and werider over time. For anyone who was bored to tears and wanted to guzzle a case of ipecac from studying tex laws, it may be time to switch to the much more fascinating world of crypto laws.

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