The Proof of Stake Alliance (POSA) has made an unprecedented effort to explore the legal issues surrounding Proof of Stake (PoS) technology. Comprised of 10 industry organizations, POSA is a non-profit alliance that aims to encourage the widespread adoption of PoS blockchain networks in the United States. Recently, they published a whitepaper on the legal aspects of liquidity staking.
Proposed Guidelines for Better Adoption
This pioneering examination of legal questions surrounding proof of stake is an effort to establish legal guidelines for better adopting PoS technology. One of the papers provides an overview of liquid staking, a novel technological solution that allows the exchange of crypto assets for receipt tokens.
These tokens are issued by liquid staking technologies to evidence legal and beneficial ownership of staked crypto assets. However, the paper delves into whether the exchange of crypto assets for receipt tokens should be treated as a taxable transaction for U.S. federal income tax purposes.
As an industry alliance, POSA’s members include leading enterprises that advance or service existing protocols built on PoS technology.
The continued development of liquid staking as a technological solution to liquidity constraints associated with PoS blockchain networks will advance POSA’s goal of increasing the adoption of such blockchain networks.
The paper explores various models of liquid staking, including the Protocol Model and the Provider Model. According to the article, participation in a liquid staking arrangement does not result in a “sale or other disposition.” Therefore, it does not give rise to a taxable event.
To qualify as a sale or disposition, the benefits and burdens of owning the property must be transferred, which is not present in a liquid staking arrangement.
However, the paper concludes that liquid stakers must grapple with the taxation of their continuing ownership of staked crypto assets, including network rewards, losses, and related expenses.
Determining their share of these amounts can present challenges like tax reporting issues throughout the crypto asset ecosystem. Some of these issues would be avoided if network rewards were taxed upon sale rather than a receipt.
In conclusion, the Proof of Stake Alliance’s efforts to explore the legal aspects of liquidity staking is a significant step in establishing legal guidelines for better adopting PoS technology.
The continued development of liquid staking as a technological solution to liquidity constraints associated with PoS blockchain networks will undoubtedly advance the goal of increasing the adoption of such networks in the United States. Further IRS guidance or legislation may be required to resolve some challenges presented in this pioneering examination of legal questions surrounding proof of stake.