Marian: The Taxation Of Block Rewards

Omri Marian (UC-Irvine; Google Scholar), Law, Policy, and the Taxation of Block Rewards, 175 Tax Notes Fed. 1493 (June 6, 2022):

This report addresses the taxation of block rewards — the rewards offered to validators of blockchain transactions in exchange for maintaining the public blockchain ledger. The main question the report seeks to answer is whether newly minted cryptocurrencies (a component of block rewards) are taxable upon receipt. Some commentators have suggested that there is legal ambiguity about whether block rewards are taxable upon receipt because of the novelty of the blockchain technology. There is no such ambiguity. Block rewards are clearly taxable upon receipt under current law.

In the alternative, some commentators have said that block rewards (or, at a minimum, staking rewards) should — as a matter of tax policy — be exempt from taxation upon receipt. They argue that tax should be deferred until block rewards are sold. Those arguments are unconvincing. Exempting block rewards from taxation when received is inequitable and behaviorally distortive. Proponents of nontaxation have failed to point to any government interest that may justify this inequitable and distortive policy. Moreover, validation activity seems to be gaining traction without government intervention. What possible interest does the government have in subsidizing activity that is flourishing without subsidy?

Finally, nontaxation of block rewards until sale is bad tax planning. It would result in the entire appreciation being subject to tax at high ordinary rates rather than capital gain rates. There is no rational reason for validators to pursue that treatment, unless the argument is about something else — that is, that validators plan to avoid taxation even when they sell their block rewards. Validators who argue against current taxation of block rewards are either very bad tax planners or not completely open about their motives.