Key Points:
Liquid staking is the technique of generating transferable receipt tokens as part of a proof-of-stake consensus mechanism on blockchains to demonstrate ownership of staked crypto assets or incentives accumulated for staking. The POSA suggested that the phrase liquid staking tokens be used instead of the term liquid staking derivatives, which it objected to as being inaccurate. Since the Ethereum Merge, interest in liquid staking has increased.
The POSA highlighted in “U.S. Federal Income Tax Analysis of Liquid Staking” that while neither the U.S. Treasury nor the Internal Revenue Agency had provided guidance on liquid staking, it should be covered by capital gains tax laws in general. The article read:
“Receipt Tokens evidence ownership of intangible commodities in the digital world in a substantially identical manner that warehouse receipts, bills of lading, dock warrants and other documents of title evidence title to tangible commodities in the physical world.”
The argument went on to say that a “liquid staking arrangement will be a taxable event only if there is a sale or other disposition of cryptoassets in exchange for property that differs materially in kind or extent,” which is commonly known as “realization” of an asset. This is in line with capital gains taxation.
An argument that a liquid staking protocol (smart contract) shouldn’t be regarded as a separate entity because it doesn’t have a second party that shares in the profits backs up that justification. The document continues, “If a Liquid Staker does not have a taxable event as stated above, the Liquid Staker then must contend with the taxation of its continuous possession of the staked cryptoassets.”
In “U.S. Federal Securities and Commodity Law Analysis of Staking Receipt Tokens,” the POSA said that determining whether or not a receipt token is an investment contract is a gating issue.
It used a case-based examination of the well-known Howey test to make the argument that liquid staking is not a security because it is not an investment contract. The Howey test’s four prongs were then looked at, and it was determined that the tokens generally failed to pass any of them.
The Reves test from a 1990 Supreme Court decision is also taken into account in this essay. This test evaluated whether an instrument qualified as a “note” based on how closely it resembled an investment contract. Several cryptoassets have been determined to be notes by the SEC and federal courts. A receipt token is not a swap, according to the paper’s argument, under the Commodities Exchange Act.
The study finds that a receipt token fulfills both commercial and security functions, akin to warehouse receipts, by enabling the user to transfer ownership of staked cash between wallets in the case that a key is compromised.
According to an accompanying statement, the papers were meant to provide “a foundation for significant legislative codification or explanation.” They were also designed to serve as a foundation for self-regulatory standards.
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