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 weird but Atoms are not meant as a general medium of exchange so I think Atom holders can deal with it.

Maybe there’s an accounting method that can properly deal with this, but if there isn’t, then the system will slowly be drained of value by taxes on income that isn’t really income.

There’s also the possibility that there is an accounting method to deal with this, but it is complicated. For example, if you had to sell and rebuy all your tokens every year to realize a loss to offset your staking “income” (I’m not an accountant, this is purely hypothetical). This would push people towards using custodial validators who could handle this operation for them, making the system centralized.



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.

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

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