Taxing DeFi? US and UK authorities may differ

Gains from participating in decentralised finance (DeFi) – to tax or not to tax? The US and UK tax authorities apparently differ in their treatment.

The US Internal Revenue Service (IRS) offered a refund to an US investor who had challenged the authority’s decision that income tax is payable on gains from cryptocurrency staking – a practice where an investor sets aside a number of tokens which are used validate the transactions made through the blockchain. The investor then earns rewards for depositing the tokens.

In 2019, Joshua and Jessica Jarrett of Nashville, Tennessee, paid federal income tax on staking 8,876 tezos tokens they earned through staking in 2019. The couple later asked for a refund arguing that the tokens they raised through staking constituted ‘created property’, much like a baker who bakes a cake using ingredients and an oven.

Joshua Jarrett posted a letter from US Department of Justice’s Tax Division on Twitter: “We write to inform you that a full refund of $3,793, plus statutory interest, sought in the complaint for the 2019 tax year has been approved on behalf of the General Attorney.

“Accordingly, the IRS has been authorised and directed to schedule an overpayment of $3,793, plus statutory interest as provided by law for the 2019 tax year.”

Commenting on the decision, Jarrett wrote: “At first glance, I got what seemed like great news. The IRS offered me a tax refund, indicating the government didn’t want to defend the position that the tokens I created through staking were taxable income.”

“But I refused the offer, because I know that until my case receives an official ruling, I have no certainty they won’t try to tax me again.”

Meanwhile, the IRS’ counterpart – Her Majesty’s Revenue and Customs – published guidance Wednesday, which reveals its thinking on taxing returns from DeFi: “How the return is taxed upon receipt by the lender/liquidity provider will depend on whether the return has the nature of capital or revenue.

“The nature of the return received by the lender/liquidity provider will depend on how the transaction is structured.

“The lending/staking of tokens through decentralised finance (DeFi) is a constantly evolving area, so it is not possible to set out all the circumstances in which a lender/liquidity provider earns a return from their activities and the nature of that return.”

Quote of the day:

Michael Saylor, founder and executive of MicroStrategy, wrote. MicroStrategy is the world’s biggest corporate owner of bitcoin, currently 125,051 BTCs (£4.7bn as of 04/02/2021).

Saylor seemed to echo sentiment of Twitter CEO Jack Dorsey, who said earlier this week that if bitcoin had existed before Twitter, the social media giant would be less dependent on the advertisement business model.

“The solution to the challenges that face Meta $FB is to integrate #Bitcoin and #LightningHigh voltage sign into their platform. They would free themselves from the pure ad model, improve the quality and security of their services, and morph into a bank in cyberspace.”

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As of 11:15 GMT: 

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