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The Taxation of Staking and Wrapping Tokens: Taking the Contrarian View  

Author:  Matthew E. Rappaport.

Source: Volume 39, Number 03, Spring 2022 , pp.3-16(14)

Journal of Taxation of Investments

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Digital assets have become very popular in recent years, but an overloaded legislative branch and IRS have given taxpayers little guidance about how to treat interesting and unique transactions the world of Web3 has invented. The government has never commented directly on the tax treatment of block rewards in a proof-of-stake system; most practitioners seem to believe the block rewards are not taxable, as the taxpayer argues in the Jarrett case, but this article discusses why the taxpayer’s argument could fail. The government is similarly silent thus far about whether wrapping tokens would be treated as a sale or exchange under Section 1001; most practitioners seem to believe wrapping is not a sale or exchange, but this article discusses why wrapping could be treated as one.

Keywords: digital assets, cryptocurrency, non-fungible tokens, wrapped crypto, staking crypto, proof of stake, Jarrett v. U.S., Commissioner v. Glenshaw Glass Co., Cottage Savings Association v. Commissioner

Affiliations:  1: Falcon Rappaport & Berkman PLLC.

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