Did the U.S. government just thumbs up on Bitcoin and down on Ethereum after the London Hardfork?
Welcome to the most complicated topic of this week: crypto tax. As the U.S. infrastructure bill moves forward for Congress approval, lawmakers are tapping their taxes into the crypto universe. They are looking into a new way to fund such infrastructure projects that cost $28 Billion Dollars.
As I always suspected that Defi will be regulated with traditional financial regulations, lawmakers are seeking to use existing financial operations to fit into crypto operations. However, it is just not that simple. For instance, they want to use swap securities rules to regulate Defi as one of the examples. I wrote an article about Defi to show how similar both operations are and I guess they read it.
Anyway, I want to show how those regulations may not work as lawmakers want them to be and it is just an educational guessing discussion here. So do not follow my poor and unprofessional advice or you may find yourself in trouble.
What is Proof of Work?
It is a form of cryptographic operation in which provers validate others using a certain amount of computational effort in order to move the process forward.
Under the Bitcoin blockchain framework, provers are called miners who use their computational power to solve mathematical puzzles as a validating process to confirm payment transactions between two parties.
The key factors here are miners' efforts to make payment successful and miners are not necessarily holding cryptocurrencies. Although they did in the case of Bitcoin because it was valued a bit expensive.
What is Proof of Stake?
It is a form that miners are also coin holders and their mining power depends on how many coins they hold.
The key factors here are holders who contribute to the mining process too and they hold coins.
Who will pay crypto taxes?
There are two versions of the bill. One will tax excludes Proof of Work and Proof of Stake (Lummis-Toomey-Wyden Amendment) and the other one will exclude only Proof of Work (Portman-Warner Amendment).
Two Future Scenarios:
If we go to the Lummis-Toomey-Wyden Amendment route, here is what will happen:
Bitcoin will be safe, and Ethereum with their Defi. Any crypto projects that use Proof of Work and Proof of Stake will be alright.
If we go to the Portman-Warner Amendment route, here is what will happen:
Bitcoin will be safe and any crypto projects that use Proof of Work will be alright.
Both Proof of Work and Proof of Stake that miners are contributing largely for the network to function. Therefore, they should all be excluded from the tax and exempt.
Taxing Proof of Stake is unnecessary because the reward is the same as from the mining process as a stake reward with crypto that does not yet exchange to take profits into fiat currency.
Therefore, any contribution to the network should be exempted.
There is no final solution and regulations are still debating. I offer my humble opinion that I do not oppose paying tax. However, I think we should justify the portion of tax without impacting the future development of cryptos.
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Disclosure: I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose cryptocurrencies are mentioned in this article. This information is only for educational