In a thought-provoking letter sent to Senators Ron Wyden and Mike Crapo, Polygon Labs presented a novel analogy to elucidate the complexities of crypto staking taxation. Drawing parallels between apple farming and crypto staking, Rebecca Rettig, Polygon Labs’ chief legal officer, offered a compelling perspective on how taxing staking rewards should be approached.
The analogy begins with a group of farmers discovering an apple orchard on ownerless land. In their pursuit of fairness, these farmers decide to take turns picking apples, each obliged to contribute the first 32 apples they pick as a stake against potential cheating. If a farmer cheats, their apples are discarded into a river. Over time, these farmers start selling their apples, thus establishing a market price. Yet, crucially, they are only taxed when they sell their apples.
Polygon Labs argues that this analogy neatly aligns with how stakers should be taxed on their newly minted tokens. The key idea is that potential rewards from staking should only be subject to taxation when tokens are sold, mirroring the logic of the apple farmers’ taxation. The company contends that taxing staking rewards as they accrue could lead to overtaxation, which contradicts the long-standing U.S. tradition of taxing only upon the sale of property without a previous owner.
This perspective gains added importance due to the ambiguity surrounding the taxation of digital assets. Senators Crapo and Wyden recognized this ambiguity in the Internal Revenue Code of 1986, acknowledging the need for clearer guidance. This recognition is particularly crucial given the rise of digital assets in today’s financial landscape.
Token Taxation Clarity: Polygon’s Perspective
Polygon Labs’ argument extends to various industries. Just as farmers are not taxed until they sell their crops, taxpayers engaged in activities such as breeding animals, creating art, or manufacturing goods are similarly taxed upon disposition. The analogy effectively highlights the consistency in taxation principles across different fields.
Moreover, Polygon Labs contends that newly minted tokens obtained through staking should not be considered income for tax purposes. They emphasize that staking rewards can only be utilized after a validator un-stakes them, making taxation upon disposition administratively simpler.
In conclusion, Polygon Labs’ innovative apple orchard analogy offers a unique perspective on crypto staking taxation. The company’s assertion that staking rewards should be taxed when tokens are sold aligns with established taxation practices in various industries. With the senators seeking input on digital asset taxation and the industry evolving rapidly, Polygon Labs’ insights may help shape future tax policies, ensuring fairness and consistency in the treatment of digital assets.