Unrealised Gains from Staking Rewards – IRS Case

Last week there was hype about an American cryptocurrency tax case. “IRS will not tax unsold staked crypto as income” was the headline of the article. Unfortunately, we cannot make an conclusion this case, and we recommend the status quo continues.

We have outlined further below the application to NZ taxpayers, but first, an overview of the IRS case.

Summary of the case

A taxpayer challenged the IRS’s position that staking income is not taxable when received. The taxpayer’s position is that newly created property is not income. They compared analogies such as how when a baker bakes a cake, the cake isn’t taxable income, or how when a writer uses their creative minds and a word document on a computer to write a book, the creation of the book is not a taxable event. In comparison, the taxpayer’s argument was proof of staking was creating a new token that was not a taxable event itself.

IRS offered to refund tax to the taxpayer. There is no explanation for the refund, and the IRS did not want to defend their position that staking rewards are taxable income. We cannot draw conclusions from this case.

The case does not provide answers and there is no guidance or memo from IRS saying that “staking income isn’t taxable until sold”. New Zealand’s  IRD says, “All amounts you get from the profit-making scheme are included as your income. This includes crypto assets and money.” A profit-making scheme includes staking.

Until the IRS issue an official ruling from the court, there is nothing to prevent the IRS from challenging the issues again. Therefore, the taxpayer has refused the IRS’s offer of a refund.

Other points to note. This is a case against the IRS in a District Court of TN; any legal decision from this case would only create a precedent in that district. To get a binding legal precedent nationwide, they should have taken it to US Tax Court. NZ is all together with a different kettle of fish (although there is nothing stopping anyone from taking this position and challenging IRD).

Ultimately, this is only a timing difference too. For example, if I receive 100 tokens of ABC today, they will still be taxable on disposal (to fiat or another token) – refer to part 1.C and part 2.C of the examples here.

Application to New Zealand and IRD

A taxpayer could challenge IRD on their position that staking rewards are income. Like most situations in cryptocurrency tax, there is a lot of uncertainty with tax positions (as outlined here).

Our opinion is that the outcome of a short form binding ruling (where a taxpayer submits their situation and the IRD rules on the tax treatment) would likely be no different from what we already know; IRD considers staking rewards to be taxable income, calculated based on the market value, on the day received.

Therefore, a taxpayer would need to challenge IRD in court (like how the American taxpayer is challenging the IRS in court), to get certainty of the outcome. This has the potential to be expensive and dragged out if IRD is not in agreement.

We (Evans Doyle) and IRD co-presented to Chartered Accountants Australia New Zealand (CAANZ), in November 2021 and Melanie Burton (Senior Tax Counsel for IRD) outlined that “crypto interest”, fees and rewards are likely to be income under ordinary concepts; section CA 1(2) of the Income Tax Act 2007.

Income under ordinary concepts was described in Reid v Commissioner of Inland Revenue (1983) 6 NZTC 61,624 (HC), which has three key features:


1. Income is something which comes in
2. Periodicity, recurrence, or regularity
3. Quality in the hands of the recipient

Conclusion

We are still in the early days of regulation (especially tax) catching up with technology and the challenges that cryptocurrency brings with it being moveable, intangible, digital property.

Contact Us

Contact us for a call or meeting to discuss any cryptocurrency tax or accounting questions. Our office is in Cambridge, Waikato, or we can arrange a video conference call.

This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

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