Polygon Labs’ Unique Approach to Explaining Crypto Staking
Polygon Labs, a significant player in the crypto space, recently employed a unique analogy to clarify the concept of crypto staking to U.S. Senators Ron Wyden, a Democrat from Oregon, and Mike Crapo, a Republican from Idaho. This educational effort came in response to the senators’ request for comments regarding the taxation of digital assets. Rebecca Rettig, Polygon Labs’ Chief Legal Officer, drew an intriguing parallel between crypto staking and apple farming.
In this imaginative analogy, a group of farmers discovers an apple orchard on ownerless property. These farmers decide to take turns picking apples from the orchard, but there’s a twist to ensure fairness and prevent cheating. Each farmer must contribute the first 32 apples they pick as an ante. If any farmer attempts to cheat, those ill-gotten apples are cast into a nearby river.
As time goes by, these farmers begin selling some of the apples they’ve collected, effectively establishing a market price for these fruits. However, what’s intriguing is that, despite the emergence of a structured system for apple distribution, the farmers are not subjected to taxation until they sell their apples. This analogy serves as the foundation for Polygon Labs’ argument that stakes should be treated similarly concerning newly minted tokens.
The Taxation Perspective
Polygon Labs posits that the potential rewards from staking should only be subject to taxation when the stakeholders decide to sell their tokens, not as they accumulate these tokens over time. The rationale behind this stance is to prevent over-taxation and align with the longstanding tradition in the United States, where a tax event typically occurs only when control and ownership of property change hands.
Senators Crapo and Wyden had requested input on the taxation of digital assets in July, recognizing the complexities surrounding the classification of digital assets within the Internal Revenue Code of 1986. This complexity has led to convoluted reporting issues for taxpayers, prompting the senators to seek a clearer framework for the treatment of digital asset transactions.
Concerns Raised by Polygon Labs
Polygon Labs is not alone in providing input on this matter. Several other organizations, including the Tax Policy Center, the Coin Center, and the Crypto Council for Innovation, also submitted letters to Senators Wyden and Crapo. Both senators hold leadership positions on the Senate Finance Committee, which plays a pivotal role in overseeing the Treasury Department’s operations.
To further bolster their argument, Polygon Labs drew parallels with other economic activities, such as extracting oil, gas, or minerals, breeding animals, harvesting crops, and even creating art or manufacturing goods. In all these cases, taxation only occurs when the property in question is sold, not during the initial acquisition or control phase.
Furthermore, Polygon Labs emphasized that newly minted tokens, acquired through staking, are essentially generated by software and should not be considered taxable income. They also highlighted that staking rewards can only be accessed after a validator chooses to un-stake them. Therefore, taxing these rewards exclusively upon disposition is deemed the most administratively convenient option.
Closing Thoughts
In their closing statement, Polygon Labs emphasized the importance of tax policy neutrality, arguing against incentivizing one product type over another. They warned that taxing staking rewards upon crediting to validators might inadvertently create such a bias without yielding significant increases in tax revenue, particularly given the nascent stage of blockchain development.
