Cryptocurrency Economics and the Taxation of Block Rewards

Abstract

This report argues that including proof-of-stake cryptocurrency block rewards in gross income when the reward tokens are first created results in inequitable taxation and would discourage U.S. taxpayers from participating in this new technology. The better approach is to tax reward tokens when they are sold or exchanged.

In this two-part report, Sutherland proposes a single taxation policy for all public cryptocurrencies. Focusing on the mechanics of proof-of-stake networks and the economic incentives underlying their maintenance, Sutherland, in the first installment, begins to make the case that reward tokens should be taxed when they are sold or exchanged, not when they’re created.

In the second installment, Sutherland explores options for the equitable taxation of cryptocurrency reward tokens based on existing policies and principles. He concludes that for both proof-of-work and proof-of-stake cryptocurrencies, the best approach is to tax reward tokens only when they are sold or exchanged.

Although cryptocurrency would benefit from legislative and regulatory clarity and certainty, the report also argues that in the meantime no act of Congress or new Treasury regulation is required to ensure the proper taxation of block rewards.

Note: Part 2 will be published on November 11, 2019.

Keywords: cryptocurrency, taxation, blockchain, economics, proof of stake, proof of work, Bitcoin, Tezos

JEL Classification: E4, E42, E52, G28, H2, H20, H24, H25, K00, K34, L51