New IRS Tax Rules Could Apply To Ethereum 2.0 But, How?

The new IRS tax rules will now apply to Ethereum 2.0 but the agency has still to provide specific guidance on how the proof-of-consensus networks like this one will be taxed and some experts already have some ideas. Let’s find out in today’s Ethereum news.

Ethereum 2.0 has finally been launched and this launch brings more important questions about how the participants of the proof of stake networks will be taxed. The IRS has yet to clarify but some experts have an opinion on it. Ethereum 2.0 is here but the IRS guidelines haven’t arrived yet. The first phase of the 2.0 upgrade which was launched earlier this week, will see ETH finally transitioning into a proof-of-stake consensus mechanism from proof-of-work. This one involved verifying transactions with raw computational power where the proof-of-stake relies on “validators” that stake tokens for the opportunity to verify blocks.

In the context of ETH 2.0, rather than mining the coins, the computers will get a reward if they verify in good faith while malicious validators can have their stashes “slashed” by the system. The IRS released zero guidance as to how the stakers should report investments in  ETH 2.0 but according to Roger Brown, the head of Tax and regulatory affairs for Lukka, the best thing we can do is to get to new IRS tax rules and guidelines from the current iteration of the tax code. One thing that you will not be taxed for according to Brown, is transferring ETH into the 2.0 deposit contract. This is a process that was going on for quite some time now. according to the existing tax rules, the deposited ETH is not treated as disposition because you still practically own it.

The ETH that is awarded actually, is rewarded after validators stake their money, and this way they can be taxable in a way that the mined BTC coins are. Brown added”

 “Staking rewards are income to you, as you are entitled to access the rewards.That is treated as ordinary income, taxable at ordinary income rates.”

Brown clarified that the rewards from any proof-of-stake validation will count as ordinary income from the tax perspective unless these rewards are dilutive and will split up the existing tokens rather than awarding new ones. Evan Weiss, the president and co-founder of the Proof of Stake Alliance said that the lobbying of the group resulted in a letter from four heads of the Congressional Blockchain Caucus to the IRS, asking that the rewards should be taxed when they are sold as opposed to when they are created for the stakers:

 “Similar to all other forms of taxpayer-created (or taxpayer-discovered) property — such as crops, minerals, livestock, artworks, and even widgets off the assembly line — these tokens could be taxed when they are sold.”