The world of blockchain technology and cryptocurrencies has been a subject of significant scrutiny by regulators worldwide. Impacted by these regulatory waves, are crypto investors engaged in validation activities on proof-of-stake networks. According to a recent ruling by the Internal Revenue Service (IRS), those investors should include their rewards as income when they gain control of those tokens.
Simply put, “The fair market value of the validation rewards received is included in the taxpayer’s gross income during the tax year when the taxpayer gains dominion and control over the validation rewards,” says the legal analysis. It’s crucial to note that the value under consideration should be determined at the point when the U.S. taxpayer gains control of these tokens.
Interestingly, the same principle applies to investors staking tokens through a cryptocurrency exchange. In this case, if “the taxpayer receives additional units of cryptocurrency as rewards as a result of the validation,” the token rewards are still considered taxable income.
While on the one hand, the IRS ruling provides a clarity, ushering much-needed tax transparency in the crypto space, yet on the flip side, the arrival of such regulation could impart anxiety among stakeholders, especially the crypto investors.
The IRS’s guidance adds to the already growing regulatory heat on the sector. The U.S. Securities and Exchange Commission (SEC), for example, has been pulling up staking services from cryptocurrency exchanges that are the subject of their accusations of illegal securities offerings. In one example, Kraken, chose to respond to these accusations from the SEC by closing its staking platform in February. Meanwhile, Binance was also called out by the SEC, which said its staking service infringes securities law.
This tug-and-pull dance between the blockchain technology sector and regulators is a critical dynamic to observe. While one can argue the necessity for certain regulatory oversight for reducing deceptive practices, on other hand, it also has an undeniable potential to stifle blockchain innovation, thereby impacting the broader premise of decentralization that industries are gravitating towards. Co-existing in a regulatory landscape that mandates tax clarity and reduces illegal activities, while fostering cryptocurrency innovation is what this sector needs, and this issue surely stands forefront up on the sector’s balancing act.
Source: Coindesk
