Crypto tax situation - Read post 1 for thread banned users

The part in bold is not correct. You do not give up control, you can stop staking whenever you decide to. The owner has control.

I disagree. You do give up control — that's what you get paid for. You can take it back at any time but, until you take it back, you don't have it. There are lots of ways of using your assets to generate income that you can stop at any time; that's not an argument against treating the income you generated before you stopped as income, rather than a capital accretion.

Dividends are, for example, income. However they are paid in cash not the underlying asset.

You've made this point, or variants on it, a couple of times. For the record, I don't think it matters at all whether your staking return is recevied in cash or in kind. Earning which, if received in cash, would be income are generally still income if received in kind. It;s the nature of the transaction or activity that gives rise to the return that determines whether it's capital or income, not the mode of payment.

Sure, there's a risk. But that would also mean you were over taxed in regards to CGT. So you be offsetting some of the missing tax, and interest instantly.

You won't pay any CGT until you dispose of the crypto acquired by way of staking returns, which could be many years after you acquired it. (So dealing with it this way not only results on a lower tax rate, but also a possibly lengthy deferral.) At the point where the tax treatment is clarified, and assuming that the clarification is "staking returns are Sch D Case IV income", you've now got an arrears, penalties and interest problem, and you may have paid no CGT because you still haven't disposed of the crypto.

But I'd be interest to know how revenue would even identify that there might be a penalty due, if they ever clarified a ruling or a create a new law specifically.

It's probably a bit hypothetical. Also, there's a variety of possible fact situations. But consider the situation outlined above. When the position is clarified, you should put in a corrected return for the year(s) in which you earned staking returns. If you don't, then at some point when you dispose of the crypto the matter will come to a head. Do you account for it as though the crypto were an accretion to capital, knowing that this is wrong, but hoping to get away with it? Honestly, you might get away with it — it's a self-assessment system. On the other hand, you might not — there are audits. And the full calculation of your gain must show that at some point you received a bunch of crypto apparently for free, which will look . . . odd.

And, it's speculative, but I would have thought that if you put in the corrected return when the situation is first clarified, you've an excellent chance of being excused interest and penalties. You can very reasonably say that there was genuine doubt; there was no published guidance; you made what seemed to you a reasonable call and you shouldn't be penalised for it. But if you wait until you actually dispose of the crypto before addressing the issue, the reception may be less sympathetic. And if could be positively frosty if, when you do address it, you still attempt to characterise the staking return as an accretion to capital.

What control do you give up? If that the basis of the assessment that it's income, it's pretty important. What purpose for the security asset do you not have available to you? Be specific.

You have to leave your crypto in the staking pool. You cannot use it in any way that is inconsistent with that. You're free, of course, to withdraw it from the staking pool, but the instant you do you will stop earning staking returns. The staking return is the reward you recieve for giving up the alternative uses of your crypto that would require it to be withdrawn from the staking pool.

There's an analogy with a demand deposit account. Interest is the reward you get for leaving your money in the account. You can withdraw it at any time, but as soon as you do you will stop receiving interest. The fact that you can withdraw it at any time is no argument for saying that the reward you receive for not withdrawing it is not income, or is not taxed as income.

(And we could push the analogy a little further. The reason you get interest for leaving your funds on deposit is that your funds help capitalise the bank, and make it possible for the bank to do a little bit more than it could otherwise do. The reason you get a return for leaving your crypto in the staking pool is that crypto in the staking pool supports the blockchain and the validation of transactions, to a slightly greater extent than would be the case if your crypto weren't there. In both cases, some value is generated by the activities that you have facilitated, and you get some of that value.)

I'm asking what "control" that is given up, compared to a asset being held for gain. That's the basis of your claim. I can't see it.

I did use the word control, but don't get hung up on that. I already said that I am hazy about the workings of crypto, so if use inapt language and have to revise it, bear with me.

I was pointing out that fact that access is in your control, in response to the misconceptions above.

I know access is always in your control; I don't think I ever suggested otherwise. There was no misconception on my part. My reasons for suggesting that crypto staking returns are income for tax purposes never depended on commitment to the staking pool being irrevocable (not least, because I never thought it was irrevocable).

A bank is a for profit business. In a nutshell. They are paying for savings, so they can charge for loans. The whole system for for profit business, and as such earnings are taxed. That is a simplified view of banking, obviously.

A DeFi crypto system is not for profit. There is not Crypto bank, who is paying you to stake your assets, so that they can charge others for borrowing them. The processes of staking, validation etc, is the creation of tokens. (We don't tax the mint when they create currency).

I don't think it's relevant that a bank is a for-profit business. (In fact, it's not necessarily true; there are not-for-profit banks.)

We don't tax the mint because it's the state; what would be the point? The Central Bank (which is the issuer of both notes and coin in Ireland) is already required to transfer its surplus income (i.e. excess of income over expenses) to the State. (Central Bank Act 1942 s. 32H).

But of course in the UK there are still private banks with note-issueing rights. The value they create on their balance sheets by issuing notes (which, because of the restrictions attending their note-issuing rights, is not very much, but is not nil) absolutely is part of their normal trading profit, and is taxed as such. So this isn't an analogy which supports your view.

If a company decided to reward shareholder who voted in the AGM with shares. They would be taxed as bonus shares (CGT) not income. If they awarded shared randomly to shareholders, they would still be bonus shares. Companies don't do that. But that's the kind of situations that crypto creates.

Precisely because companies (for good reasons) don't do that, I don't think we can say categorically what the tax consequences would be if they did do that. But it's probably worth thinking about why they don't do that.

Remember what a company is. A bunch of people get together, contribute money to a pool, which is then used to finance and conduct an enterprise. In return for contributing their capital to the pool, the people get shares in the company, which represent equity in the underlying enterprise. The value of the shares goes up and down, depending on how well the enterprise performs and is expected to perform.

Right. Bonus share; what's going on here? The enterprise performs well; large profits are earned and banked. The value of the shares goes up because the assets of the company now include a big wodge of retained earnings.

What can you do with a big wodge of retained earnings? You can leave it sitting in the bank; you can expend it in supporting or expanding the business; you can pay it out as dividends.

Long-term, leaving it sitting in the bank is the lousiest option. If you pay it out to shareholders they can put it in the bank themselves, if that's what they want to do. The resources of the company should be employed productively in whatever the company's enterprise is. If they're not needed for that purpose, or can't be productively employed for that purpose (e.g. the company's directors do not see a growth opportunity that would productively use that amount of money) then they should be paid to shareholders. So in principle retained profits should only sit in the bank until it's appropriate to decide between investing them or distributing them.

If you distribute them, great, they go out as dividends.

If you reinvest them, they are now long term committed as part of the working capital of the enterprise, and it's no longer appropriate to be showing them in the accounts as retained undstributed earnings. So you capitalise them; you write down the retained earnings, create addtional share capital, and issue bonus shares.

And you do this strictly in proportion to existing shareholdings, because those are the proportions in which the owners of the company are entitled to the profits of, and equityin, the enterprise. This is treated for tax purposes as continuing capital because that's what it is. And it doesn't generate a liability to CGT at this point because it remains locked up inside the company.

So if a company did issue bonus shares to selected shareholders for e.g. attending the AGM, they couldn't categorise this as a capitalisation of earnings, because if they did they'd be committing a fraud on the shareholders whose earnings they were, but who didn't attend the AGM. And if they tried to do that then (apart from lawsuits from the defrauded shareholders) I don't think revenue would accept that this was a capitalisation of retained profits, and treated as such for CGT purposes. It's quite clearly a payment (in kind) for attending the AGM. Not fundamentally different from paying employees or contractors in stock (which you can do, if you have shareholder approval). And payments to employees in the form of stock are taxable as income (though there may be tax reliefs or incentives available to reduce the tax hit — but it's an income tax hit that's reduced).

So, a crypto DeFi system is, as you point out, not a bank. But it's also not a company. If not being a bank means that staking returns aren't entirely analogous to interest, then not being a company means that staking returns also aren't entirely analogous to bonus shares. But I suggest that the fact that staking returns aren't paid proportionately to all holders of the same crypte means that they're not even approximately analogous to bonus shares, because that's pretty fundamental to the whole nature of bonus shares, and the whole reason for taxing them as they are taxed.

I think we've spent too long talking about what staking returns are not. The correct tax treatment depends on what they are, not what they aren't. So, can you explain to me, in terms that I can understand, how crypto staking generates value, and how some (or all?) of that value accrues to the people who staked their crypto?

You also said it is not used for your purpose too. What purpose it is not used for? If that purpose is speculative holding, that applies equally in or out of a pool.

What does it matter what the purpose is? Serious question. All that's relevant here is that keeping your crypto in the pool means you're not using it for other purposes. Since you ask, the other purposes for which you're not using it include:

• trading it
• lending it
• using it to buy things

So, in deciding whether to stake your crypto or not, part of the process involve balancing the return you might get by staking against the return or utililty you might get by employing your crypto in on of these other ways.

Basically, staking is used to validate the block chain. In return the blockchain introduces new tokens. This increases supply. If done to without control, it would value to drop not be created. It's an alternate to the Bitcoin proof of work format for crypto.

Thank for this.

To dig a little deeper into it — and please correct my understanding if it's wrong in any material respect — the blockchain is a distributed ledger. Blocks (basically, lists of transactions) are held separately from one another on different computers. They are chained together using cryptography; each successive block added to the chain references the previous block. For the blockchain to work, all the users have to agree on the same chain of blocks. When a new block is required to be added, validators forge the link in the chain which will tie it to the preceding block. Hence validation is essential for the blockchain to work.

When you stake your crypto, you signal your interest in acting as a validator. The more crypto you stake, the more likely is is that you will be selected as a validator. The process is automated; if you're selected a node (your computer, or the computer of a staking service, if you have delegated to one) runs software that performs the required staking duties.

You do have certain responsibilties — ensuring your node is online, has up-to-date software, etc — but these, too, you can delegate these to a staking service so that, for you, this can be a set-and-forget arrangement. You sign up with a staking service, decide how much crypto you wish to stake and sit back and wait for the rewards to roll in.

You get a reward for acting as a validator. The reward is usually in the form of additional crypto though, obviously, conceptually it doesn't have to be; it could be cash, or anything. Obviously, if you have retained a staking service, they take a cut of the rewards you would otherwise get.

Why can't you signal your interest in allowing your node to be used in this way without staking some crypto? All that validation actually needs is the computing power to run the software, so why do you have to stake crypto to be a validator? Why can't you just make a node available? The crypto is collateral; if a validator does their job badly — maliciously, negligently whatever — and the blockchain is corrupted or degraded as a result, they lose some of their staked crypto. Thus staking crypto is a token of good faith; you're putting your money where your mouth is; you are selected because you are trusted to do the job well, since you are at risk if you do it badly.

Is that more or less it? Is anything wrong there? Have I left out anything that I should have included?