Burn unstaked tokens instead of rewarding staked tokens

When a delegator receives staking rewards, this will probably be seen by tax authorities as income. In reality though, the delegator is simply maintaining their financial position in the system, as their tokens are being inflated along with everyone else. Unless this is dealt with somehow, it will result in the system leaking value out to taxes at a compounding rate. There’s a good thread about this possibility here: https://twitter.com/ceterispar1bus/status/1113116321925877760 Here’s a good summary of the issue: Yes. Said the same to someone last week. If everyone stakes, no one gets richer, but the taxing authorities still demand their cut of the income. The higher the “yield,” the higher the portion of the market cap that gets eaten by gov each year. — Ben Davenport ( @bendavenport ) A simple solution suggested in the thread: The better tax answer is to forfeit (burn) unstaked coins. But again, no one ever asks me before designing these things, so this is purely hypothetical. — Alice Tax ( @towneslaw ) What this could look like is that all unstaked Atom accounts are reduced by the “inflation rate” every block and there would be no inflation rewards. This would be…

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I am imagining a buyback&burn of stock by its corporation. It reduces the total supply of the stock which usually results in risen stock price.

And risen stock price also results in tax, so I see the same result in both way.

Is the taxation of dividend and trade profit have significant difference in US tax law?

Profits from stocks held for less than a year are taxed at your ordinary income tax rate. Ordinary dividends earned on your stock holdings are taxed at regular income tax rates, not at capital gains rates.

It seems like both have same rate of taxation.

But, if the reward is dealt as interest rate, the tax rate will be lower than the two described above.

There are a lot of complexities here.

How do you account for sub-uatom burns. For inflation and fees we track sub uatom rewards and then only truncate on withdrawl.

Iterating over the entire account set might be acceptable if we amortize for a large number of blocks and do this infrequently.

we probably need to devlope some sort of amortization strategy so the cost of iterating over every account is spread over many blocks.

When a delegator receives staking rewards, this will probably be seen by tax authorities as income.

It will be seen as capital gains and what is the problem with that ?
I don’t really get the purpose of this question. Are you writing a proposal whose sole goal is tax avoidance ?

I am not a tax expert but would like to share my dummy’s thoughts. Let’s use an example. If the total intrinsic value of 200M atoms is USD1,000M, this means each atom worths USD5.

Assuming the intrinsic value of the tokens have not changed after 5% inflation. So the total number of atoms is now 210M while the total intrinsic value is still USD1,000M. Each atom worths an intrinsic value of USD4.76.

Assuming there is only one guy holding all atoms and he has staked all atoms and earn all the 5% inflation. Assuming the market price of atom fully reflects the intrinsic value. So the 5% of atoms, which is 10M atom is subject to income tax, which is now worths USD47.6M.

At the same time the price per atom has dropped from USD5 to USD4.76. The difference of USD0.24 is now an impairment loss (foreign exchange loss?) and should be tax deductible depending on jurisdiction. So this means the originally 200M atom has suffered a foreign exchange loss of 200M * USD0.24 = USD48M.

In this case, the guy has actually experienced an operating loss of USD0.4M and should not be subject to income tax.

You rounded, there would be no loss. It’s 47.6M in gains and 47.6M capital loss, not 48M.

standaa: It will be seen as capital gains and what is the problem with that ? No, rewards given by the system to stakers will be seen as income. I have no problem getting taxed on capital gains for tokens that have appreciated between the time I bought them and the time I sold them. standaa: I don’t really get the purpose of this question. Are you writing a proposal whose sole goal is tax avoidance ? The purpose of inflationary rewards to stakers is to take money from the people who are not staking, and give it to people who are staking. This is to incentivize people to stake. I think we all agree on that, right? Taxes aside, this mechanism is economically equivalent to one where you simply burn the Atoms of those who don’t stake. But it is implemented in such a way, that without clever accounting, delegators will be liable for income tax every year, rather than capital gains when they sell. You bring up “tax avoidance”. What most people don’t like about tax avoidance is not the fact that less taxes are collected. If you want the government to collect more taxes, just vote for a tax increase. What people don’t like about tax avoidance is that it…

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Yeah I agree with your goals here.

What needs to be done is

1. Figure out a coin destruction algorithm that doesn’t require iterating over every account.

2. Figure out how this will work with exchanges. Do they need to run a version of the coin destruction algorithm themselves to distribute the destroyed coins to each customer account?

If what I suspect to be the future where we hit 95%+ staked coins, I would recommend stopping inflation through governance entirely at some point and this become moot.

Yea, the ideal scenario would be to have tx fees be healthy enough to incentivize stakers on their own.

I’ll think about the coin destruction. It probably only needs to be done before coins are spent. But I agree that it could wreak havoc on custodial services by breaking a core assumption. Maybe it’s best that we just get to a post-inflation system ASAP by having lots of apps and tx’s on the hub.

I went on about this problem for a while back in 2017 when I first started learning about taxes for real. I also always strongly favoured demurage to inflation because even though “in theory” they might have the same effect, in practice the psychology of losing coins vs getting new coins is profoundly different, and obviously the market doesn’t correct the prices as quickly as the inflation is issued. So you have my heart here In any case, making this work for custodial services was always cited as the main challenge. Though I think it would just mean that such services would require one address per client, and wouldn’t be able to pool funds. Is there more to it then that? Of course users of the service would need to know they are subject to the demurage rates still … Custodians aside, if we had a UTXO model it would be a bit simpler - coins could be deducted whenever you go try to spend the output according to how old it is. Of course, since the effective demurrage rate changes according to the amount stake, you’d have to partition the age of the UTXO into intervals according to the rate in each interval, and then get a final answer. For non-UTXO system like ours, perhaps…

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Okay I think I have design for a system that avoid the tax problems but avoids the structural problems with naive demiurge but allows treating staking rewards as capital gain. High level overview of the proposed system. • Staked coins are converted to a discrete entity called a bond. The Initial voting power of a bond is proportional to the number of coins burned to create it. A bond is permanently attached to a validator. The voting power of a bond increases on every block by some percentage. Slashing reduces the voting power of every validators bond. • Bonds can be directly transferred between users via a bond transfer transaction. • Bonds can be liquidated into staking tokens. When a bond is liquidated, the voting power disappears and a proportional number of staking tokens are minted. This emulates demurrage because voting power become more expensive in terms of available staking tokens permanently. It solves the liquidity problem with earlier versions of the demurrage design where voting power becomes too expensive to purchase. The accrual of voting power to bonds should not be correctly treated as income because it is non-fungibly bound to the slashing…

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How is this different than if inflation was auto-bonded?

It’s mostly about how the UX is presented which unfortunately is relevant to tax authorities.

it would also be effectively opt-out autobonding which opts into the income tax regime.

And what’s the relevance of

Bonds can be directly transferred between users via a bond transfer transaction.

It makes the bonds an appreciating capital asset where gains can be realized without destruction. I think it strengthens that case that native staking rewards are not income.

So if I understand correctly, the differences from the current system basically boil down to: • inflation is auto-bonded • delegations can be transferred to another delegator And the goal of (2) is to convert the bond from a non-transferable and income generating account to a transferable and appreciating capital account. It’s a cool idea, but I’m not sure the transferability really makes the case for it not being income. For instance the closest analogy I can think of are shares where the dividends are paid in the shares themselves. I believe those dividends are still treated as income. So it seems that so long as there are increases in the native denomination of an asset, it may be deemed as income. Unless I’m missing something? Also, I’d be a bit concerned that transferable bonds might have unintended consequences on the economic security since it means they can change hands without going through an unbonding period, and what was once a commitment to wait before you could liquidate becomes no longer so. As for It solves the liquidity problem with earlier versions of the demurrage design where voting power becomes too expensive to purchase. Are these…

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But there is no increase in the native denomination of the bonds. 1 bond always equals 1 bond. It’s just the denomination of unexercised liquidation option that is increasing.

Transferable bonds do not weaken economic security because the bond is still attached to the validator and still slashable. Liquidation is the only way to recover a fungible asset with no potential slashing risks.

Isn’t the voting power increasing?

And maybe not the economic security per-se, but something about it’s time preference. If 100% of atoms were bonded, you’d have to wait 3 weeks (at least in protocol) before you could acquire any stake. If bonds were liquid, you could get them right away. Not sure exactly how this should be interpreted w.r.t some definition of security. Possibly it’s irrelevant, but just pointing it out.

you can’t change the validator that bond is attached to in my proposed construction. So selling bonds doesn’t change voting power.

I’d probably suggest removing redelegation in this design.

Some reasoning that this might not help.

You have to pay income taxes on imputed interest if nothing actually pays out.

https://www.sec.gov/fast-answers/answerszerohtm.html H/t Arthur Breitman

This seems like it opens up another layer of social challenges around deciding what validator to bond to. Wrapping my head around the implications of that.

Following closely. We’ve been assuming for pragmatism we need to essentially fork the inflation model of the hub for Regen, but we also prefer demurage and I’m very interested how this intersects with our current design work around bonding oracles and other network service providers.

There are number of assumptions on tax side being made here. To design a system based on these assumptions will have have a number of unintended consequences when IRS (and other tax authorities) decide how to treat PoS awards. Assumptions in this conversation that are by no way obvious: 1) Awards will be treated as “income” or “capital gains”. See here for a good discussion https://www.gibsondunn.com/wp-content/uploads/2019/01/Hamano-Staking-Out-New-Territory-Taxation-of-Proof-of-Stake-Protocols-Tax-Notes-01-28-2019-.pdf There are decent arguments for neither, at least until disposition of the rewards into fiat. 2) Cosmos/Atoms are like a “stock or stock issuance”. Or they could be a SoV. Or Utility token. Or ? Each one will have potentially different impacts on tax treatment. 3) How regulatory authorities view the original issuance of Atoms will effect #2, which will effect #1. And on and on. Further, every change made and how that change is made will potentially effect other regulatory aspects i.e. securities regulation. We may be solving one problem while creating larger problems in other regulatory areas. Proceed with caution…

This covers a very narrow and specific area of tax law as it pertains to zero coupon bonds. Tax law is incredibly complicated. Think better approach then picking one analog example would be complete survey of possible approaches…

I t will effectively eliminate short-term traders who will create trading volume. Without volume, atom price will fluctuate like crazy. without trading volume, some big malicious capitalist can crash Atom price. Laws of economic is simple. we have to lower interest rate. we have to let market choose number of validators.

I agree, any design making assumptions about tax treatment should be run by tax attorneys from many different countries before being implemented.

This discussion will also probably be more productive in about a year once everyone has paid taxes from staking.

Interesting take- are you saying that people selling Atoms to pay their income taxes every year will create volume, which is good in and of itself?

What I mean is “inflating coin” is better than “burn unstaked token” scheme. (Don’t get me wrong, I think low inflation is better.) What I mean is paying validating income tax is better than punishing speculators. Because speculators are extremely valuable asset to chain ecosystem since they provide volume that is essential for token price. if you burn unstaked token, there will be no trading volume becuase short term traders will leave!

I really think inflation should much lower then now. that will create more trading volume.
one more tip : if you want to punish short-term traders in order to focus on long term investors , short term traders ( speculators) avenge will find chain. This is lessons learned from previous chains.
If cosmos want to learn not from history, but from experience, it will be sad thing.

Thanks for the insight. Reducing inflation will also make this issue insignificant, and maybe that’s the right solution anyway.

Another idea.

Whenever unstaked coins are moved, a percentage is burned promotional to the number of blocks the tokens have immobilized.

Bonded tokens can be unstaked and moved without incurring any burned.

No inflation is necessary. The curve of the burn on move is determined by amount of total coins bonded.

Great idea! No technical issues since all systems are designed to take a variable tx fee into account anyway.

This is awesome. Slight optimization, the validators can calculate when account owes more than its worth and remove the account from the various DBs.

jtremback: When a delegator receives staking rewards, this will probably be seen by tax authorities as income. In reality though, the delegator is simply maintaining their financial position in the system, as their tokens are being inflated along with everyone else. Unless this is dealt with somehow, it will result in the system leaking value out to taxes at a compounding rate. There’s a good thread about this possibility here: https://twitter.com/ceterispar1bus/status/1113116321925877760 Here’s a good summary of the issue: Yes. Said the same to someone last week. If everyone stakes, no one gets richer, but the taxing authorities still demand their cut of the income. The higher the “yield,” the higher the portion of the market cap that gets eaten by gov each year. — Ben Davenport ( @bendavenport ) A simple solution suggested in the thread: The better tax answer is to forfeit (burn) unstaked coins. But again, no one ever asks me before designing these things, so this is purely hypothetical. — Alice Tax ( @towneslaw ) What this could look like is that all unstaked Atom accounts are reduced by the “inflation rate” every block and there would be no inflation…

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Just read through this thread. What is current sentiment about this topic, and what are the current blockers from moving forward? @Gregory , Ethan Frey and I have been continuing this discussion with Regen Network, concerning our own token economics (currently our tokenomics are basically a fork of the ATOM). Here is how I would summarize on a non-technical level: For optimal network security, Proof-of-Stake systems rely on a high percentage of the total supply of staking tokens to be staked. Tokenomically, it was originally proposed (in systems such as Cosmos) that this would be achieved by disincentivizing non-staked tokens. By the time this theory was turned into practice, mechanism design morphed such that, rather than punish non-staked token holders, the chain would reward staked token holders through a mechanism erroneously dubbed “inflation” (inflation actually refers to the value of a currency, not its supply). Game-theoretically, these two mechanisms (demurrage of non-staked tokens and supply increase of staked tokens) have identical outcomes of incentivizing staking. In the real world, they have some notable differences. As tax law doesn’t take into account the…

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Maybe have to stake after x amount of days to safeguard your coins. Great idea.

Kava is coming, powered by chainlink as an oracle
CDP for Atom XRP BTC as collateral with burn and mint as a core engine.
Is going to be a great time ahead for Defi
Their medium is stunning and full of promises.

This is not very complicated. If tokens are restaked they are not taxed. The staked ATOMs will not be taxed nor the rewards taxed if they stay with the staker and are used for network purposes. The taxable event is selling the ATOMs for US dollars.

If staking rewards were in USDC, then you can make the case that taxation is an issue. But they are not. They are in ATOM. ATOM is not shares of a corporation that entitles you to a share of its profits earned in US dollars. ATOM are voting shares in a multi-jurisdictional distributed computer network which does its transactions in ATOM, not US dollars. In other words, nothing happening on the ATOM network is taxable until somebody sells their ATOMs for US dollars. That is the only taxable event.

US taxation is measured in US dollars (hence the US dollar is “unit of account”). Unless some activity is measurable directly in US dollars by being converted to US dollars, it is not taxable.

See this thread.

antechristus #343

Taxation is different depending on who issues the staking rewards, where the staking happens and who and where the staker is. If you have a self-custody wallet like Keplr and you stake your ATOMs there and stake them and restake them, you have no tax liability. All of the economic activity happens on a multi-jurisdictional computer network and it is hard to determine in which jurisdiction the economic activity actually is and what tax law applies. The ATOM you are getting and re-staking is not converted or measurable in US dollars and as such there is no measurable economic activity which to tax. I may be an Italian and my validator might have his computers in Guatemala. Not sure why US tax applies here in any way. However, if you bought your ATOM on Coinbase and you staked it on Coinbase and Coinbase is your validator and Coinbase issues your staking rewards and Coinbase is a registered/official exchange on which they can get a price for ATOM in US dollars easily, Coinbase can then issue you an annual tax form stating what is now your taxable income from your ATOM staking rewards. Even though, I would find even this somewhat questionable unless you convert your ATOM staking…

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I know its hard to believe but there are other jurisdications than the US. So yes indeed its very complicated because everything you wrote would be absolutely wrong in my jurisdication, i will spare you the details though.

Here we go. We have come to the place in development, where taxation becomes the deciding factor in crypto. *Takes his hat off

Your concerns about taxation on staking rewards highlight a broader issue in the evolving landscape of cryptocurrency regulations. It’s crucial to note that existing tax laws often struggle to keep up with the novel features of blockchain networks, especially in the context of inflationary token distributions. Comparing staking rewards to traditional dividends is a common but flawed analogy, as staking rewards don’t originate from profit-making activities disbursed to shareholders. In the case of cryptocurrency, staking rewards involve a redistribution mechanism of existing value rather than the creation of additional value. Currently, there is a lack of jurisprudence and established tax rules specifically addressing these new use cases. As a result, the problem you’re attempting to solve may not even exist within the current regulatory framework. It’s essential to recognize the need for ongoing dialogue and legal developments in this space to address potential challenges like the one you’ve highlighted. Additionally, it’s worth noting that regulators are more likely to lean towards capital gain taxes as the chosen tax system for staking rewards. This approach would involve…

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Could this even be enforced on bridged ATOM?

Wouldn’t this wreck LPs?

Unfortunately it’s not quite that simple. The IRS has released a ruling which says that they consider staking rewards income when earned.

If a cash-method taxpayer stakes cryptocurrency native to a proof-of-stake
blockchain and receives additional units of cryptocurrency as rewards when validation
occurs, the fair market value of the validation rewards received is included in the
taxpayer’s gross income in the taxable year in which the taxpayer gains dominion and
control over the validation rewards.

These rulings are not laws, and could be challenged in court, but most people are probably going to comply with them until they are overturned in court (which is probably unlikely).

But anyway, this is a thread from 2019 when the Cosmos Hub was one of the first experimental PoS systems. It’s obviously very unlikely to happen now.

But staking rewards are being earned continuously every second. How do you price that? Tick by tick pricing? Is the depth of the market sufficient to guarantee that the price quoted will actually be received if the trade was executed? Pricing continuously distributed staking rewards is a much bigger logistical challenge than tracking stock sales and stock sales are very difficult for the tax authorities already. Just ask the accountant of a day trader. Regulation at Treasury during the Yellen era is very ideological and led by Sen. Warren who is the de facto economic czar in the Biden administration. She is a big government ideologue and MMTer who generally believe in the totalitarian supremacy of fiat currency - the state must extract all value from its dominion via inflating the currency. Key to that strategy is eliminating all competing forms of money and in particular gold and other commodities which can act as an inflation outlet. For that reason the price of gold is controlled via the central banks which own more than 40% of the world supply of gold and can price control it for several decades (same with silver). Gold and silver are government run cartels just like OPEC+…

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BTW, Senator Warren at some point needs to be censured because she says a whole bunch of things on TV that are clearly unconstitutional and can’t happen in the US. The federal wealth tax is not even debatable. She obviously is not an idiot so what she says is clear demagoguery and electioneering. She routinely goes way beyond constitutional norms. I don’t want to engage in ideological debates of what should and shouldn’t be done. The US has a constitution and that’s that. Other countries have different views on government power over its citizens and wealth taxes and unrealized taxation there is possible. But not in the US under the current Constitution (which people like Warren swore to uphold). The federal government can’t make you pay tax on unrealized income in the US. If you created a painting at home, should you get taxed for it? What is the value of the painting? The answer today is, when you sell the painting then you pay federal income taxes on the sale. Now, maybe your state has a painting appraiser and they can estimate the painting and then YOUR STATE can levy a property tax on it before you sell it. But the state only does that for very expensive paintings. They…

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If that comment was for me (sorry unsure about it), then i missed it. If it was, i think you misjudged my views on taxation. I have 0 concerns about it. I have concerns people trying to push on-wards their slave-like thinking, shaped by society over the last several 100s of years, onto this new paradigm we are trying to build here - blockchains. Other than that, no concerns =)

Here is another 2 cents on the slave topic: an average slave would cost 20 solidus in the Roman Empire. The word “solidus” comes from “solid” which meant to describe a 1 oz round gold coin. A senatorial toga (ie a nice formal suit) costs 1 solid or 1 gold coin. A slave costs 20. Now, 1 oz of gold is $2000. So as such a nice average formal suit costs today about $2,000 and a slave costs $40,000. So if you are making minimum wage in America, you are more or less a slave by Roman standards. Hope that helps. Nothing really has changed. Economics laws just like gravity are the same through the millennia. Keep in mind that slaves in the empire (currently America) are better compensated on a nominal basis than the average barbarians (non Romans). That doesn’t necessarily mean that slaves live better lives than barbarians, but their compensation (as measured in non-sovereign currency like Gold) is definitely higher. So freedom from imperial yoke has a cost and that is being poorer (in gold terms). And btw, the word “soldier” comes from “solidus” (ie people paid to fight). And as such the saying “soldier of fortune” is somewhat of a tautology brought about by a general lack of classic…

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Sometimes slavery is deep inside the head my friend. Its fixable though