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.