Congress must understand: Block rewards are newly created property, not income.
Some proposals merely defer income tax treatment for miners and stakers without doing anything about the underlying misconception
Mining bitcoin creates new property. The Bitcoin software permits those who successfully validate transactions to create new coins for themselves. There are currently more than 20 million bitcoins in circulation, and in the next ten minutes, when a miner validates the next block, they will be able to create 3.125 more bitcoins that previously did not exist.
Under longstanding principles of tax law, newly created property is not taxed when it is created. It is taxed when it is sold or exchanged. When an author writes a novel, a farmer harvests a crop, or a software developer codes up an application, they do not owe income tax merely because they created something valuable. Tax is due when that property is sold or otherwise commercialized.
The same principle should apply to cryptocurrency block rewards.
For years, Coin Center has argued that newly created cryptocurrencies generated by miners and stakers should be treated as newly created property and taxed when they are sold or exchanged, not when they are created. We have urged the government to reconsider IRS guidance that treats block rewards as immediate income. We have supported litigation brought by solo staker Joshua Jarrett. And earlier this month I testified before Congress in support of legislation that would move tax treatment closer to these longstanding principles.
The key question is simple: what exactly is a block reward? A validator is not being paid an existing asset by another person. Rather, the network’s software allows the validator to create a new unit of a cryptocurrency and assign it to themselves. As Coin Center and several other tax scholars and practitioners have noted, newly minted tokens are better understood as newly created property than as income received from another person.
Unfortunately, some policymakers have proposed legislation that would require validators to recognize taxable income from block rewards after a fixed period of time, such as five years, even if those assets have not been sold. While this approach is intended as a compromise, it rests on the assumption that block rewards are income that merely deserves temporary deferral. This approach misunderstands how the technology actually works and disrupts longstanding tax principles.
A mandatory recognition deadline would also create unnecessary complexity. On networks such as Ethereum, new blocks are validated every few seconds. Taxpayers could be required to track countless separate recognition dates and valuations despite never having sold the underlying assets. The result would be substantial compliance burdens with little corresponding policy benefit.
Fortunately, there are several paths forward. Congress can enact legislation such as the Tax Clarity for Mining and Staking Act introduced by Rep. Carey, which moves tax treatment closer to the treatment of self-created property. Via lawsuits like those by Joshua Jarrett, courts may ultimately conclude that current IRS guidance is inconsistent with existing tax principles. And the administration can revisit that guidance, as the President’s Working Group on Digital Asset Markets recently recommended.
Coin Center will continue working through Congress, the courts, and the administration to advocate for tax treatment of block rewards that is consistent with longstanding tax principles, technological realities, and sound public policy.