DeFi and GameFi Just Became Tax Free in the US?

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(Edited)

If you're the type to light candles for your heroes, light one for Josh and Jessica Jarret.

Jarret Note

This couple sued the IRS over their claim that staking rewards of Tezos coins are not income because they are newly created property.

I'll spare you the nuances of how this works tax-wise, but the important thing is that they won.

Edit: Reporting over this has been conflicting. Seems that they have not won yet.

Edit 2: It seems the source of the confusion is that the IRS offered the refund. That's essentially stipulating that the Jarret's claim is right. But the court case is still going on because the Jarrets want to establish firm precedent. At this point, it is being widely assumed that they will prevail in court since the IRS agreed to the dr

As of now, staking rewards where you stake assets in order to create new assets is not a taxable event. The analogy used in the case is a baker combining flour, eggs, sugar, and so on into a cake. The newly created cake is not income. When the baker sells the cake, that sale is the income.

More fundamentally, this court decision says that combining resources to create new crypto is not taxable.

That sounds an awful lot like any kind of reward token. Like you get from mining. Or from play2earn games like Splinterlands. Or from DeFi yield farming.

Obviously Splinterlands is a big deal for me and for a lot of you all reading, so let's tackle that specifically.

I buy card assets, then go through a process to create new DEC (and eventually new SPS). Is that a combination of resources to create a new product? Sounds like it to me. Earn DEC, only pay taxes when I sell DEC for something else. Check.

I buy SPS and stake it to generate new SPS and vouchers. Is that a combination of resources to create a new product? Sounds like it to me.

I buy cards, SPT, plot claims, liquidity pool tokens, skins, and packs to generate new SPS. Is that a combination of resources to create a new product? Sounds like it to me.

In general this decision suggests that any time you are minting a new coin, it's not taxable until it sells.

Similarly for the LEO, HIVE, HP, and HBD this post will earn (if any lol).

Putting up stake and compounding just became a lot more attractive.

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31 comments
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Do you happen to have a link to the legal decision?

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Based on this I started looking, and it looks like the reporting over this has been shoddy. It appears the case is still ongoing, so not final yet.

I edited the post to reflect that.

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Will be eagerly awaiting an update when a final decision is rendered. This is a huge development for the crypto space.

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That is pretty smart of them not to accept the money. Even though it had been a full year and a half, it still felt just a little to easy. Like there was some catch they were going to hit them with later. That or let's just capitulate them now so we can regroup and attack this from a different angle. I hope that isn't the case. I have a relatively big NFT collection and many of them earn me passive income in one form or another. There have only been two instances that I have moved those tokens into fiat and I have the money set aside to cover those taxes. Thinking I might have to account for all of the other micro transactions happening on my account gives me nightmares!

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They are being trailblazers by not accepting the money. Neal is right. If they push it to court, the odds are they are going to win since it is already out there the IRS is looking to settle.

However, getting a judgment puts it on record which basically makes it law. If the IRS tries to go after anyone else, a suit can be filed and the attorney simply points to this case.

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(Edited)

There must be a serious need for documentation of this case.
Thank you for an otherwise great article!
/miko
PS: so after commenting I thought I'd just google the shit out of it myself, and that seemed to work:
https://www.proofofstakealliance.org/wp-content/uploads/2021/05/IRS-Tax-Litigation.pdf

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This is the complaint. I've been searching based on the incorporated references and it seems the case has not been settled yet. Different media sources are reporting different versions of what is going on.

As far as I can tell, case is still ongoing and I've edited the post to reflect that.

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This is HUGE!

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Thank you for your witness vote!
Have a !BEER on me!
To Opt-Out of my witness beer program just comment !STOP below

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You need to stake more BEER (24 staked BEER allows you to call BEER one time per day)

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Similarly for the LEO, HIVE, HP, and HBD this post will earn (if any lol).

In your view, this applies too?

How is this not earned income? Is it because the payout is in new property that was created?

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This is such a huuugely good news to hear. Thanks a lot for the update!
!PIZZA

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Wow. Thanks for bringing this to our attention! I follow crypto news pretty closely, and I somehow missed this. Now I'm going to watch how this plays out.

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As Neal commented, the case is still ongoing so it is easy to miss.

Until there truly is a final decision, it is still up in the air. That said, the IRS obviously feels this is a loser since they offered to settle (if that is true).

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(Edited)

Interesting stuff, if the screenshot is reflecting correct information it seems to me as the case would reflect that staking rewards aren't taxable. The willingness to give a refund is the smoking gun here. That's not to say the case is a slam dunk, anything is still possible. Nice find, thanks for sharing.

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It is one of those situations where the publicity is to the point that if they do lose, it will keep working its way up the appeal chain.

This will not go away quietly if they lose. But yes I agree the offer to settle tells us what the IRS feels about their case.

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Victory for one, victory for all!

Still, I am not cleared on how the government plans to execute the collection of crypto taxes. Transactions are done privately so, how do they plan to know how much a person made and how to collect the taxes?

On the whole, this tax on cryptocurrency is uncalled for, IMO!

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Banks transactions are also private too. The government doesnt have access to that info without a court order.

The tax burden is on you to file and pay the proper amount. They (the IRS) simply audits to see if correct.

At that point, the government works to prove that you didnt pay.

Finally, keep in mind that all on chain transactions are public. They can be easily viewed. That is why KYC is so important to them at the exchange level. They can then follow you around seeing all you do.

Unless you MimbleWimble when it goes live. That might add a layer that they are not happy about.

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Wawu!

The explanation is loud and clear.

Well, all of these isn't applicable in my country though.

No doubt the government might try to fight projects trying to introduce some more privacy.

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I was pretty ticked off when the government was trying to tax newly created tokens and crypto. It honestly made zero sense and taxing like that would have killed crypto to be honest. Trying to tax someone on perceived value because any income is made is absurd so I'm seriously hoping we can concrete clarification on this because it's critical to crytpo and needs to be taken seriously by everyone. I bought this up months ago and continue to defend it.

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...taxing like that would have killed crypto to be honest.

Nah. Crypto is much bigger than one country or taxes.

Plus, even India's 30% is better than nothing. Think back to the early 1980s when the capital gains tax rates were through the roof (granted there were different tax structures so it isnt an exact comparison). Nevertheless, even at a 70% tax rate, people still invested.

Besides, the more they push onerous taxes, the greater the likelihood we see a lot of privacy development start to take place. More MimbleWimble.

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I won't believe it until I actually see in the tax code! However, if this is true I will be preparing.

  1. Acquire stakeable tokens. As many as humanly possible.
  2. Stake as many of those tokens as possible in DEFI
  3. Take out loans against the staked tokens - also tax-free.

Tax free living?!? :-)

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