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Crypto news: Taxing DeFi? US and UK authorities may differ

By Daniela Ešnerová


Updated

Calculator and coins with individual cryptocurrency logos.
US Taxpayers argue tokens created by taking as nontaxable 'created property' – Photo: Shutterstock

Gains from participating in decentralised finance (DeFi) - to tax or not to tax? The US and UK tax authorities apparently differ in their treatment.

The US Internal Revenue Service (IRS) offered a refund to an US investor who had challenged the authority's decision that income tax is payable on gains from cryptocurrency staking – a practice where an investor sets aside a number of tokens which are used validate the transactions made through the blockchain. The investor then earns rewards for depositing the tokens.

In 2019, Joshua and Jessica Jarrett of Nashville, Tennessee, paid federal income tax on staking 8,876 tezos tokens they earned through staking in 2019. The couple later asked for a refund arguing that the tokens they raised through staking constituted 'created property', much like a baker who bakes a cake using ingredients and an oven.

Joshua Jarrett posted a letter from US Department of Justice's Tax Division on Twitter: “We write to inform you that a full refund of $3,793, plus statutory interest, sought in the complaint for the 2019 tax year has been approved on behalf of the General Attorney.

“Accordingly, the IRS has been authorised and directed to schedule an overpayment of $3,793, plus statutory interest as provided by law for the 2019 tax year.”

Commenting on the decision, Jarrett wrote: “At first glance, I got what seemed like great news. The IRS offered me a tax refund, indicating the government didn’t want to defend the position that the tokens I created through staking were taxable income.”

“But I refused the offer, because I know that until my case receives an official ruling, I have no certainty they won’t try to tax me again.”

XRP/USD

0.62 Price
+2.650% 1D Chg, %
Long position overnight fee -0.0753%
Short position overnight fee 0.0069%
Overnight fee time 21:00 (UTC)
Spread 0.01168

BTC/USD

65,463.90 Price
-0.400% 1D Chg, %
Long position overnight fee -0.0616%
Short position overnight fee 0.0137%
Overnight fee time 21:00 (UTC)
Spread 106.00

SOL/USD

179.75 Price
+2.410% 1D Chg, %
Long position overnight fee -0.0753%
Short position overnight fee 0.0069%
Overnight fee time 21:00 (UTC)
Spread 2.2651

DOGE/USD

0.13 Price
-1.410% 1D Chg, %
Long position overnight fee -0.0753%
Short position overnight fee 0.0069%
Overnight fee time 21:00 (UTC)
Spread 0.0012872

Meanwhile, the IRS' counterpart – Her Majesty's Revenue and Customs – published guidance Wednesday, which reveals its thinking on taxing returns from DeFi: “How the return is taxed upon receipt by the lender/liquidity provider will depend on whether the return has the nature of capital or revenue.

“The nature of the return received by the lender/liquidity provider will depend on how the transaction is structured.

“The lending/staking of tokens through decentralised finance (DeFi) is a constantly evolving area, so it is not possible to set out all the circumstances in which a lender/liquidity provider earns a return from their activities and the nature of that return.”

Quote of the day:

Michael Saylor, founder and executive of MicroStrategy, wrote. MicroStrategy is the world's biggest corporate owner of bitcoin, currently 125,051 BTCs (£4.7bn as of 04/02/2021).

Saylor seemed to echo sentiment of Twitter CEO Jack Dorsey, who said earlier this week that if bitcoin had existed before Twitter, the social media giant would be less dependent on the advertisement business model.

What is your sentiment on ADA/USD?

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"The solution to the challenges that face Meta $FB is to integrate #Bitcoin and #LightningHigh voltage sign into their platform. They would free themselves from the pure ad model, improve the quality and security of their services, and morph into a bank in cyberspace."

Top coins by market capitalisation

As of 11:15 GMT: 

Markets in this article

BNB/USD
Binance Coin / USD
581.47 USD
-6.97 -1.200%
BNB/USD
Binance Coin / USD
581.47 USD
-6.97 -1.200%
BTC/USD
Bitcoin / USD
65463.90 USD
-265.55 -0.400%
ETH/USD
Ethereum / USD
3333.84 USD
-147.31 -4.230%

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The difference between trading assets and CFDs
The main difference between CFD trading and trading assets, such as commodities and stocks, is that you don’t own the underlying asset when you trade on a CFD.
You can still benefit if the market moves in your favour, or make a loss if it moves against you. However, with traditional trading you enter a contract to exchange the legal ownership of the individual shares or the commodities for money, and you own this until you sell it again.
CFDs are leveraged products, which means that you only need to deposit a percentage of the full value of the CFD trade in order to open a position. But with traditional trading, you buy the assets for the full amount. In the UK, there is no stamp duty on CFD trading, but there is when you buy stocks, for example.
CFDs attract overnight costs to hold the trades (unless you use 1-1 leverage), which makes them more suited to short-term trading opportunities. Stocks and commodities are more normally bought and held for longer. You might also pay a broker commission or fees when buying and selling assets direct and you’d need somewhere to store them safely.
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