The rising energy consumption of block chains based on Proof-of-Work (PoW), is increasingly being designated as a significant ecological disadvantage of crypto-currencies. One approach to counter this is to Proof-of-Stake (PoS). Also the Roadmap of Ethereum provides a transition from PoW to PoS. In the Following is to be examined, therefore, what is the meaning of the Whole from a tax perspective.
The following article presents a summary of the development of CryptoTax to the tax implications of Proof of Stake. It was written by Klaus Himmer, CEO and Co-Founder of CryptoTax.
The technological situation
To be able to participate in the consensus finding of a Proof-of-Stake-based Blockchain, that has to be a certain number of Coins provided. TRANS-action, legitimacy can be ensured that the consensus rules of deviant behavior with the withdrawal of the network provided Coins will be punished. In addition, the law on the part goes out in the Staking process. The probability of block determination is to be determined not according to the provided computing power, but after the surrendered Coins. In addition to this Variable are determined in practice, however, often other factors, which are intended to serve different purposes.
PoS and PoW are different ways of finding a Consensus in a decentralized network and therefore have a homogeneous objective. The technical procedures and the practical implications are, however, crucial differences.
Since the Mining of popular crypto currencies for many small investors will be unprofitable in the last few months a Trend to participate in PoS systems to capital for investment purposes. Incentives be created so that investors participate not only to win of course, but by Staking an additional source of income can be achieved without special Equipment or Expertise is needed.
In addition to the economic factors of the Nodes can be other reasons for Proof of Stake listed:
- lower energy consumption and environmental friendliness
- lower risk of centralisation by large Mining farms
- no need for additional Hardware, to participate actively in the Consensus
- greater involvement of the Community
If Proof of Stake offers in the context of the capital investment and also tax advantages, significantly depends on the tax treatment of the Staking-income and potential price gains or losses of the received Coins. Furthermore, it is – in particular, by the homogeneous objective with Coin-Mining is questionable whether the participation in the PoS-is to classify the method as a commercial activity.
Demarcation for commercial and self-employed
The German income tax act (EStG), with the division of income in the Income and profit types of income, there is a rudimentary breakdown of the various sources of Income. The resulting taxation consequences derive from this Association and are also subject to other types of income specific rules. In General, commercial Mining has the consequence that the far-reaching regulations must be observed for the operation of a business. These begin with the mandatory registration with the competent trade licensing office, and extend the business tax to the accounting regulations of trade and tax laws. It shows that a commercial classification of Proof-of-Stake could affect both the associated administrative expenses, as well as the cost-effectiveness of investment significantly.
What are the activity as a commercially apply, following the principles of § 15 Abs. 2 of the EStG. Accordingly, for this purpose, the following requirements must be met:
- Intention to make a profit
- sustainable Operation
- Participation in General economic traffic
Furthermore, the three negative delimitation circumstances exist:
- Distinction from private asset management
- Accrual for self-employed work in accordance with section 18 of the income tax act
- The delimitation between agriculture and forestry in terms of section 13 of the income tax act
Especially against the Background that the participation in the PoS process, only a minimum and a one-time setup effort for the Investor means and, therefore, rather the character of a passive investment met, should not Staking regularly to business income, since the condition of independence, as well as the distinction from private asset management may not be enough. The Crossing of the private asset management by the Supreme court case law, a tremendous amount of this activity. Entertainment, own business, hiring employees of, or active participation in the market by offering services to third parties, consistent evidence of Exceeding the privacy of rooms.
The individual test steps are shown in the Overview in the following graphic:
The risk of a commercial classification of Proof-of-Stake is assessed as very low. Special caution is needed, however, in Staking-like activities such as Operating a Masternode.
Income from Staking could be compared with non-industrial Mining. In both cases, for the System, the necessary operations are performed, the are remunerated by the respective Cryptocurrency. In addition, Proof-of-Stake has, however, inevitably the character of a capital investment, since the actual activity of the Investor’s values to the provision of assets and the smaller technical Details – such as the position of the connection with the network – limited. A tax classification of Staking income as income from capital assets will be eliminated, but clearly, as the prerequisites of § 20 EStG are not met.
Since Staking can lead to income from capital assets and similarly, no other types of income is applicable, the catch-all provision of the income derived from other benefits of § 22 no. 3 EStG. As an “other service” is any act, refrain from acting or to Tolerate described that gives rise to a counter-performance. The trigger for this should be the behavior of the Taxpayer and may be established in relation to the PoS through the active participation of the Investor, as well as the Consensus. The counter-performance, which was triggered by the action of the Taxpayer, may be paid in cash or in kind. Thus, payments on a virtual Basis in the context of § 22 no.3 EStG can be detected.
The taxable income resulting from the Excess of revenues over expenses. In addition, a free limit of 256 euros per calendar year. To note is that the Crossing of a free-at-frontier in contrast to a free amount the tax liability of the total income under § 22 no.of the EStG.
The foregoing discussion of the show, is the inflow to their own Wallet or an Exchange Account in the context of other income liable to income tax. Moreover, in the case of the sale of the by Staking preserved Coins gains or losses may be incurred.
Basically, crypto-currencies represent the prevailing view, private-sector goods, which tax may cause the relevant sale transactions within the meaning of section 23 EStG. For the examination of a taxpayer’s operation within the meaning of § 23 of the income tax act there is a need for further requirements. Must have in addition to a sale of the asset, a tax effective cost likewise. The crucial point is that by Staking preserved economy produced goods through its own performance and remuneration is not given to the acquisition of the real. The taxing event of a private Sale, however, requires, by definition, a previous-fee acquisition process. Since this is not available in the case of Proof of Stake, should not be any gains on a sale regularly controlled. Exchange rate losses, realised by the sale of Coins, which are originally received from a staking activity, will remain consequently, also for tax purposes, be disregarded.