Polygon Labs Explains Crypto Staking to Senators Using Apple Farming Analogy
Polygon Labs, in response to a request for comments on the taxation of digital assets, used an analogy to explain crypto staking to Senators Ron Wyden and Mike Crapo. The analogy involved a group of farmers finding an apple orchard on ownerless property and agreeing to take turns picking apples. To prevent cheating, each farmer had to contribute 32 apples, which would be thrown into a river if they cheated. Over time, the farmers sold some of their apples, establishing a market price. Polygon Labs argued that stakers should be taxed on their newly minted tokens when they are sold, rather than when they are accrued. It warned of potential over taxation and highlighted the U.S. tradition of not taxing the exercise of dominion and control over property without a previous owner.
Taxing Newly Minted Tokens Upon Sale
Polygon Labs emphasized that potential rewards from staking should be taxed upon the sale of tokens, rather than when they are earned. It pointed out that the Internal Revenue Code of 1986 does not have a clear classification for digital assets, causing complex reporting issues for taxpayers. The company argued that taxing staking rewards when they are credited to validators could create an imbalance between different product types in the blockchain industry. Instead, they suggested that taxing staking rewards upon disposition would be the most administratively straightforward option. Polygon Labs compared this approach to the taxation of property, such as oil, gas, minerals, and agricultural products, which are only taxed when they are sold.
Industry Feedback on Taxation of Digital Assets
Other organizations, including the Tax Policy Center, the Coin Center, and the Crypto Council for Innovation, also submitted letters to Senators Wyden and Crapo regarding the taxation of digital assets. These letters aimed to provide input and address the complex reporting issues and lack of clarity in the current tax code. Both senators lead the Senate Finance Committee, which has jurisdiction over the Treasury Department. The lawmakers acknowledged the need for clearer guidance on the treatment of digital asset transactions and expressed a desire to examine how the Internal Revenue Code can provide such clarity.
Hot Take: Polygon Labs Advocates for Taxing Staking Rewards When Tokens Are Sold
Polygon Labs has offered an innovative analogy to explain the concept of crypto staking to Senators Wyden and Crapo, comparing it to apple farming. The company asserts that stakers should be taxed on their newly minted tokens when they are sold, rather than when they are received. This approach aligns with the taxation of various other assets, such as oil, gas, minerals, and agricultural products, which are only taxed upon sale. Polygon Labs also highlights the need for clear guidance on the taxation of digital assets, as the current tax code lacks a straightforward classification for these assets. The company’s proposal aims to prevent potential over taxation and ensure fairness in the blockchain industry.
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