Learn more about global taxation standards for mining and staking, and prepare yourself for the costs before investing in cryptocurrency.
The enthusiasm around crypto-based ventures and their potential for large returns has never been seen before. Online and offline communities can’t stop talking about token purchases, mining, staking, and farming. Still, only a few people take time to consider whether their freshly earned income will be taxed, and how much tax agencies are prepared to take.
In this post, we’ll look at how mining income and staking rewards are taxed, as well as what influential organizations and governments have to say about it and how you can prepare your finances. Let’s get started!
Cryptocurrency investing is commonly associated with token trading and mining. On the other hand, staking is another way to include passive income in one’s crypto investment portfolio.
To stake crypto coins, an investor must deposit coins in a liquidity pool and keep them locked to earn rewards. This procedure is based on the fact that cryptocurrencies rely on blockchains, which require verification mechanisms to confirm each transaction and store data on the chain.
Every blockchain has a consensus protocol to ensure that transaction data is accurate, and the most common mechanisms are Proof-of-Work and Proof-of-Stake. Users stake their coins in the PoS method by locking them in liquidity pools in the hopes of being chosen to build a new block on the network. Through staking, investors are confirming transactions and contributing to the overall security of the blockchain.
The blockchain then compensates staking pool investors because it is an essential aspect of the network’s functionality. The staker will earn interest while the coins remain locked, similar to a savings account. The longer the coins are staked, the higher the gains will be.
Due to the lack of legislation governing crypto staking taxation, taxpayers around the world are adopting their own interpretations of how crypto-based revenues should be taxed. Some argue that because stakers provide services when validating blocks, the tokens should be treated as ordinary income and taxed as soon as they are received. Others consider staking earnings to be a return on investment, so tokens should only be taxed when sold.
This debate has recently heated up in the United States, with the IRS agreeing to settle a lawsuit filed by Joshua and Jessica Jarret, in which they sought a refund of taxes paid in 2019 on staking income. While the refund may have appeared to be good news, indicating that staking would be tax-free, the truth is that the institution determined that this matter was not worth their time.
This case merely demonstrates that the problem of taxing staking rewards has yet to be resolved. Until then, investors in the United States can refer to Notice 2014-21, which treats mining and the receiving of coins in return for services as ordinary income taxed at the time of receipt. Miners must also report any capital gain or loss when the coins are sold under this legislation.
Much like the US, many other countries are still in the early stages of regulating the taxation of cryptocurrency investments. Here is a shortlist of countries that have established some tax guidelines:
United Kingdom: Staking taxation is dependent on whether the profits are considered a capital asset or revenue, according to a recent update by the UK’s tax department detailed by CoinDesk. Earnings over £12,300 will be taxed at 10% for basic rate taxpayers if they are considered a capital asset.
Italy: While the country has yet to pass a law governing cryptocurrency taxation, Italian authorities currently regard cryptocurrencies as foreign currency, which means that any proceeds or income earned between or from crypto-based transactions are subject to a 26% substitutive tax, according to The Cryptonomist.
Canada: As displayed in the official statement, this government recognizes cryptocurrencies as a digital asset, and staking rewards are treated as income, meaning that the rewards are taxed when the coins are sold. When calculating, the investor must take into account the crypto’s fair market value as well as the federal and provincial income tax rates.
Germany: Unlike the other nations, Germany considers cryptocurrencies to be private money, which suggests that coins must be held for at least a year to be tax-free. Indian Times explains that the holding time for staked crypto can be up to ten years. Prior to that, any transaction worth more than €600 is taxed.
Staking has shown to be a viable source of crypto-based passive income, so GamesPad decided to include it on its platform to stay current with investor preferences.
We are genuinely concerned about our users’ experience. In this way, we have created an interface that allows investors to easily choose which pool to stake their coins in. They can then efficiently calculate their earnings in order to submit their income and pay the associated taxes properly.
Here’s how you can stake your coins with GamesPad:
Extra tip: Look for pools with high uptime percentages and low payment fees. Something between 2% and 5% fee is a good deal.
Congrats! You’ve just gotten into staking!
When compared to typical investment possibilities, crypto mining and staking can be exciting financial endeavors for investors searching for a more rewarding income. However, it is critical to pay special attention to your country’s crypto-based investment taxation legislation so you don’t have to deal with severe fines later on.
Would you like to start investing in the most impactful crypto gaming, NFT and metaverse projects with GamesPad? Learn how in this comprehensive tutorial!
Disclaimer. This material should not be construed as a basis for making investment decisions or as a recommendation to participate in investment transactions. Trading digital assets may involve significant risks and can result in the loss of invested capital. Therefore, you must ensure that you fully understand the risk involved, consider your level of experience, investment objectives, and seek independent financial advice if necessary.