Cryptocurrency and the Taxpayer’s Obligations

If you participated in the latest tax season, you (or your accountant) may have noticed that the United States tax reporting guidelines for cryptocurrencies are uncertain at best. According to Brian Hamano, tax associate at Gibson, Dunn & Crutcher LLP, ‘Notice 2014–21, 2014–16 IRB 938’ is the only official publication that addresses cryptocurrencies, classifying them as property for federal income tax purposes.

Financial reporting and tax reporting require monthly income calculations. If earnings are taxed on an accrual basis (ie. ‘day earned,’ rather than ‘day withdrawn’), then unpaid earnings need to be reported as well. Miners on the Bitcoin network, for example, should report their mining rewards (BTC) as gross income 1) at fair market value and 2) on the date that they earned them. Bitcoin produces records of these mining rewards, but Cosmos does not.

Does not compute..

The Problem with Cosmos’ Staking Rewards

Since Tendermint, the blockchain software running Cosmos hubs and zones, doesn’t generate transactions for staking rewards (aka mining rewards) as they’re accrued and/or distributed, there is no way for a software application to request past account balances or past reward accruals. For tax reporting, that’s a problem.

Without a solution, we anticipate that Cosmos participants will face new hurdles while trying to comply with tax laws — a considerable burden for accounting teams. If staking rewards don’t exceed the overhead necessary to manage them, it will be a barrier to attracting off-chain capital (ie. new network investors). Figment Networks is addressing this problem.

Solution

Figment is producing records of staking rewards.

Beginning May 1, we began providing each of our delegators with downloadable CSV reports for their daily rewards income. All delegators who delegated to Figment prior to May 1 now have a single entry income report concluding at the end of April, and daily reporting beyond April. We will be extending this reporting service to our delegators on Terra and Iris, as well as any other Cosmos Hubs and Zones as they come online.

Reporting rewards for taxes is essential for legal compliance, and should be a basic component of any high-end staking service. We’ll be working with members of the Tendermint team and the Cosmos validators to find the best solution to make reporting available for the broader Cosmos community.