Category Archives: criminal tax law

But what Is Staking? Before we consider the tax implications of staking, let’s discuss what staking is. Staking is very similar to having an interest bearing bank savings account. Dash, Neo, OKcash, Tezos (XTZ) are some cryptocurrencies you can stake. You can leave these coins in your wallet and/or an exchange that supports staking, and receive periodic payouts based on the amount of funds you stake. The above snippet shows how staking rewards appear on a dashboard of a major US crypto exchange. 

Staking rewards are taxable. However, the exact tax treatment for staking rewards isn’t as clear as one would think. Here is why. 

Staking rewards resemble interest income, in that the process is quite similar to depositing funds into a bank account and receiving interest based on an annual interest rate. If you apply this theory, staking rewards may look similar to interest income. Interest income is generally reported on IRS Form Schedule B Part I. However, the Internal Revenue Code (IRC) defines “interest income” to see if staking rewards are actually interest income for tax purposes. According to Reg §1.61-7, “Interest income includes interest on savings or other bank deposits; interest on coupon bonds; interest on an open account, a promissory note, a mortgage, or a corporate bond or debenture; the interest portion of a condemnation award; usurious interest (unless by State law it is automatically converted to a payment on the principal); interest on legacies; interest on life insurance proceeds held under an agreement to pay interest thereon; and interest on refunds of Federal taxes”. 

Clearly this definition of “interest income” does not have anything that describes income derived from staking cryptocurrencies. Additionally, per Deputy v. Du Pont, 308 U.S. 488 (1940), “Interest in its usual import is the amount which one has contracted to pay for the use of borrowed money. In the business world, interest in indebtedness means compensation for the use or forbearance of money”. Now, the key here is that the interest is derived from having money as principal. Coins you stake are not treated as “money” for tax purposes. 

According to Notice 2014-21, cryptocurrencies are treated as property. Therefore, it could be argued that staking rewards are not interest income for tax purposes although it may share many characteristics of interest income in the real world. If staking rewards are not interest income, how should it be treated for tax purposes? 

According to Reg § 1.61-8, “gross income includes rentals received or accrued for the occupancy of real estate or the use of personal property”. Personal property is any property that is not real property like land and building. According to Notice 2014- 21, virtual currencies are treated as property, and all general rules applicable to property are applicable to virtual currencies. 

If we view crypto currencies you are staking as “property”, you could easily argue that you are renting a property and receiving rental income. Income received from renting an asset or property is not clearly interest income. If this is the case, staking rewards could constitute rental income and may also be subject to passive/nonpassive income categories depending on your level of participation in the staking. Rental income is typically reported on Schedule E of Form 1040. 

One thing to keep in mind is that, all communications issued by the IRS related to cryptocurrency taxation have been “general guidance” (Notice2014-21, 45 FAQs & Rev.Rul. 2019-24). These should not be viewed as the tax law. The guidance describes how the IRS believes existing tax laws are applied to crypto transactions. They are intended to help taxpayers with tax filings and improve compliance. Since these guidance are not law, in the court of law, you may argue against certain positions taken by the IRS. 

In the absence of clear laws, it is extremely important that you treat staking income consistently every tax year, until clear guidance are issued. Clearly, staking income is taxable and you should definitely report that on your taxes irrespective of the interest income vs. rental income argument. It’s also a good practice to use Form 8275 when you take controversial tax positions on your return. 

Also remember that if you receive staking rewards, make sure you check “yes” for the crypto question on Schedule 1. 

Have a Crypto Currency Staking Problem?

 Contact the Tax Lawyers at 
Marini & Associates, P.A.  

for a FREE Tax HELP Contact us at:
www.TaxAid.com or www.OVDPLaw.com 
or Toll Free at 888-8TaxAid

Sources:

On Feb. 5, 2020, Wood and her mother, Adams, pleaded guilty to failing to pay over employment taxes. Adams is scheduled to be sentenced on July 9, 2020. In addition to the term of imprisonment, U.S. Senior District Judge N. Carlton Tilley Jr., ordered Wood to serve three years of supervised release and to pay approximately $2,338,766 in restitution to the United States.

The largest component, $352 billion, is attributable to underreporting of taxes. Large corporation (assets of $10 million or more) tax noncompliance contributes an estimated $26 billion to the average annual underreporting Tax Gap.

This audit was initiated to evaluate the selection process, use of resources, and examination productivity for corporate returns examined as part of the Large Business and International (LB&I) Division’s Discriminant Analysis System (DAS) workstream.  Approximately 44 percent of Form 1120, U.S. Corporation Income Tax Return, examinations during Fiscal Years 2015 through 2018 were closed from the DAS workstream. If

TIGTA Analyzed The 10,755 Returns Closed in the DAS Workstream During Fiscal Years 2015 Through 2018 

and Found That 47 Percent Were Closed
With No Change to the Tax Return.

TIGTA analyzed the potential cost for excessive time charged to no-change returns, i.e., time in excess of 200 hours, and estimated that potentially $22.7 million was spent examining no‑change returns in excess of 200 hours.

Of the 10,755 returns:

• 7,831 returns (73 percent) were systemically selected, i.e., were selected as the primary tax return to be examined.  
• The overall no-change rate for these returns was about 55 percent (4,327 of the 7,831), and 
• The no‑change rate was generally high across all activity codes for businesses with assets of $10 million or more (ranging from 44 percent to 61 percent).

The LB&I Division is updating the DAS model to improve the no‑change rates.  However, TIGTA found that the LB&I Division is not leveraging all available information to improve the model, such as the examination scope and which tax issues are the most productive to examine.  LB&I also plans to test the new formulas only on returns that are nearly a decade old.

TIGTA Reviewed The Examination Results For The 10,755 DAS Returns and Found That the LB&I Division
Is Not Adequately Monitoring DAS Examination Results
To Assess Whether The Model Is Effectively Ranking Returns
Based On The Likelihood of Potential Tax Adjustment.

When assessing the productivity of its models, the LB&I Division does not use the actual examination amount when an examination results in a refund.  Instead, it treats examinations that result in a refund as no change in tax.  By not using the actual examination amount for refunds, the LB&I Division’s productivity is skewed to the positive and does not accurately reflect the true compliance impact.

TIGTA recommended that the LB&I Division:

• Develop an action plan to reduce the examination no-change rates; 
• Avoid working pickup returns unless issues are established on primary tax returns that may affect prior or subsequent years; 
• Minimize hours expended on no‑change closures; 
• Test newly developed formulas on current examined returns;
• Consider breadth of scope and noncompliance issues found in past examinations; and 
• Analyze DAS return actual examination results on a regular basis. 

The LB&I Division agreed with two recommendations and will formulate a plan to reduce the no‑change rate and hours incurred.  The LB&I Division also plans to analyze examination results on a regular basis.  

The LB&I Division disagreed with three recommendations pertaining to the DAS model and noted that it released a new DAS model in April 2020.  The LB&I Division also disagreed with using actual examination dollar results for evaluating the effectiveness of the DAS model.

 

To view the report, including the scope, methodology, and full IRS response, go to: https://www.treasury.gov/tigta/auditreports/2020reports/202030031fr.pdf.

Have a Tax Problem?

 Contact the Tax Lawyers at 
Marini & Associates, P.A.  

for a FREE Tax HELP Contact us at:
www.TaxAid.com or www.OVDPLaw.com 
or Toll Free at 888-8TaxAid