Monday, August 15, 2022
Henry Ordower (St. Louis; Google Scholar), Block Rewards, Carried Interests, and Other Valuation Quandaries in Taxing Compensation, 175 Tax Notes Fed. 1551 (June 6, 2022):
In this article, Ordower contextualizes block rewards litigation with historical failures to tax compensation income paid in kind. Tax fairness principles demand current taxation of the noneconomically diluting block rewards’ market value.
The Jarrett litigation, however, threatens to create a new compensation income tax benefit administratively or judicially without a sound foundation for violating horizontal equity principles. Block rewards are compensation for network maintenance services and taxable immediately. Given the ongoing trading in each cryptocurrency’s tokens, there is no uncertainty as to the value of the rewards when received. If the inconvenience of reporting the income suggests that immediate inclusion in income undermines the growth of an important and essential new technology industry, the remedy ought to be with Congress.
I do not believe the industry to be essential but rather view it as generating an investment product with some limited practical applications. Nevertheless, cryptocurrency proponents might persuade Congress to subsidize the industry with favorable tax treatment consistent with Congress’s abandonment of horizontal equity principles in the enactment of the qualified business income deduction. That deduction favors sole proprietorship income over income from the performance of services as an employee and further favors income from businesses that generate income only indirectly based on the reputation or skill of the owners over income from those directly based on the reputation of skill of the owners.