The new precedent of Jarrett v. United States (IRS Waves White Flag in Lawsuit Over Taxability of Cryptocurrency Staking Rewards) is movement in the correct direction that staking rewards should not be taxed until they are sold. Although, this is not an official ruling yet, I would like to be optimistic about the outcome. How should I be treating the entry and labeling of staking rewards to prevent them from being treated as income when they are received? Further, it is difficult for me to understand how different transactional labels in Koinly reflect on their classification as income. Is there a Koinly help document that discusses the effects of different labeling (airdrop, reward, mining, loan interest, etc.) ?
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I have the same question.
Yes, I have the same question. Thanks, Jerry for posting this!
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Iâm going to guess (no proof at the moment) that any transaction that is a simple unlabeled deposit is not counted as income. This suggests that removing the reward labels from all staking rewards transactions will negate their being counted as taxable income. Since I donât really expect Koinly to respond here, I will have to do some experimentation with the income reports and labeling of transactions. If I find my hypothesis to be true, I will report back here in this topic.
Removal of the ârewardâ label from a staking reward turns it into a simple deposit. I took a random reward, removed the label, and the income total on the reports page decreased by exactly the right amount. I will now look at the reports generated to confirm this result, but Iâm sure they will do so. Therefore, if you decide to take a bit of an aggressive taxation regulation posture, you may simply remove the reward label from all staking rewards transactions (just rewards that take the form of newly created tokens, not fees, dividends, or other true income). This will eliminate considerable taxable income for the year and allow you to only be taxed when you trade or sell your rewards. This will also keep you from paying unnecessary taxes on rewards that have greatly diminished in value as time has progressed.
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if @Jerry_Craigseller guess is true, I would kindly ask to integrate a batch âuncheck/switch off Rewardsâ function as we all probably have 1000s of rewards transactions that would have to be switched manually otherwiseâŚ
Yes! I have thousands.
Income reports generated before and after labeling have confirmed that removing the ârewardsâ label from a deposit removes it from the income report.
Also, note that other labels of a deposit convert it to income, including: reward, airdrop, loan interest and income. I have never used the âminingâ or âforkâ labels, so I am unsure of these at the moment. I will do another experiment for these labelsâŚ
Mining and fork labels also turn a deposit into income.
So, now I have a different quandary. If receipts from the sale of reward coins count as income at the time of the sale, not when originally received, then is the value of the rewards at original reception time zero? In other words, is there no capital gains calculation at all, just normal income at the time of sale. If this is true, I donât know what Koinly is going to calculate, since it DOES assign a value to the original deposit, even if it is just labeled as a normal deposit. Sigh. Iâm going to have to investigate this with some more report experiments.
So, moving a deposit around in time affects its value when received and therefore the gains received when you eventually sell it. Makes perfect sense. I was confused before. This is all about WHEN you realize profit or loss (whether it is normal income, short-term capital gains or long-term capital gains.) Rewards are not counted as normal income at the time of reception, so there is no taxable event until you sell. The capital gains are then calculated according to the difference between the value at granting and the value received when sold.
Iâm adding my request that Koinly make an official statement on how they plan to handle this decision, and the sooner the better given that tax time is coming up quickly. It should be done by setting original value at zero for purposes of calculating later capital gains when sold and not including any transactions labeled as staking (or probably LM) as income. But it would obviously be better for everyone if users didnât have to go back and manually alter transactions (as others have noted). Iâm guessing most people involved in staking and LM have hundreds or thousands of transactions.
I really donât know, and canât find any information on, whether the value of ânewly created propertyâ is relevant at the moment of creation. If I create a book or farm a tomato, it really doesnât have a value until it is sold. This suggests that the item is created at zero value for tax purposes. On the other hand, crypto has an objective value when granted according to the market conditions at the time. I donât know if this matters or not.
Here are yet some more considerations in this can of worms. We have talked almost exclusively about rewards, but an additional consideration is the first âact of stakingâ itself and whether this constitutes a taxable trade or not. (This topic also overlaps with providing coins to liquidity pools.) There are various factors at play here including whether you received a staking âreceipt tokenâ or not, whether the âreceipt tokenâ is itself farmable or tradeable, and whether the stake is locked or unwithdrawable for some period of time. IRS guidance is sparse and mostly revolves around âdomain and control,â but can also hinge on who is taking the risk and opportunity in the transaction. All of these considerations may need to be considered on a case by case basis unfortunately, and certainly impact the way you may want to enter these transactions in Koinly.
If we have to wait for all these issues to be sorted out by lawsuits involving the IRS, it will be decades before we have any guidance, and it STILL may be ambiguous. While you could blame the IRS for not addressing the simple variations of these problems, you also have to admit that the ever-creative crypto industry is constantly inventing ever more elaborate staking/lending/borrowing/farming protocols which lend themselves to incredibly difficult income labeling and tax calculations.
So if this becomes official, all we need to do is set the Treat Rewards as Income and Treat Minings as Income to false. I just tried it and Koinly assumes zero-cost on all rewards and mining transactions.
From what I read, the defendant rejected the refund in order to get an official precedent, and the court case wonât be till 2023, so this is far from a decision.
I would like to add in here and ask Koinly to make a clear recommendation on how to handle liquidity pools ( like Uniswap) when you enter into the pool, they do not mark as liquidity in and you cannot. Then you mark as send to pool but when you receive a different amount of tokens later how do you handle? On the rewards yes they will be fully taxed when sold later but if you hold a year it would be long term vice income in present year so that is the only benefit I see.
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LPâs For the record, Iâm not a fan of the auto âLiquidity Inâ and the creation of another wallet. The explanation from Koinly as I recall is that this sets it that it is a non-taxable event. Just remember to create a separate transaction if the amount of tokens increases on âLiquidity Outâ. Well the âSet to Swapâ is also a non-taxable event, without all the extra wallet. Still doesnât answer what about the returned different token amounts⌠Thoughts?
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