I assume that is one thing we now have to contemplate for staking ADA as effectively?

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  1. Great article, I enjoyed reading. Definitely some food for thought here….
    It would be super handy if staking rewards were able to get paid into a seperate address from which ADA was staked or delegated from.

  2. I don’t think this article is properly taking into account the full picture. When the coins devalue you will have an unrealized capital loss of the same size of the income, which has positive value. If your marginal income tax is the same as your capital gains tax rate, you break even tax-wise. if your capital gains tax rate is higher than your marginal income tax rate, you can actually win to this.


    Let’s use the same PIE example. For simplicity, assume staking happens once a year, and everyone gets as a one-time event 5% of what they are staking. There’s 100 PIE out there and it’s worth $1 each and I buy 10 for $10 total. There are 9 other holders with 10 PIE each. PIE grows by 5% and now we each have 10.5 PIE, but it’s worth $.95238 each. Let’s assume the markets are perfectly efficient and the instant the stake comes out the value of PIE drops (essentially PIE is now trading ex-div). The value of my .5 PIE received is $.47612. If my marginal income tax rate is m, I owe .47612m dollars on this.


    Let’s say then I were to sell all of my PIE right after. The .5 PIE I got from staking has a cost basis of $.47612 and is worth that much, so there’s no realized capital gain or loss from it. The remaining 10 PIE have a cost basis of $10, but are only worth $9.5238, so I have a realized capital loss of $.47612 on this. Suppose my capital gains tax rate is c, I now can book a capital loss worth .47612c dollars from this.


    How is this worth .47612c dollars? Let’s assume I have $100 in capital gains from other sources (selling stocks or other coins which appreciated) also taxed at c, and I owe 100c on them. I can claim my capital losses from PIE against these an I will now only have $99.5238 in capital losses and owe 99.5238c dollars, lowering my taxes owed by .47612c dollars.


    The article only showed have the picture. I will make/lose to taxes (.47612)(c-m) in this scenario. For most people in the US, the short term capital gains tax rate is near or higher than the marginal income tax rate (depending on many factors) and so you can actually win to this, provided that you sell your PIE to realize short term capital losses and have short term capital gains at least exceeding you would have needed to pay anyway exceeding the staking income. If not, you can roll over the losses. Note that this also works with GAAP since you would be selling the PIE you first bought to realize the capital losses (FIFO). I’m not a CPA or attorney, but I don’t think there is anything prohibiting wash sales in crypto, so you could even use the proceeds to buy back the PIE after selling it to retain your exposure.


    I think the details can get fuzzy and complicated here, and you might be losing due to difference in marginal tax rates, inefficient markets, exchange fees, the value of your time, etc. But I think theoretically this issue is moot, or, at the very least, not nearly as bad as it is made out to be, since this article needs to account for the unrealized short-capital losses that the depreciation will credit holders of a stakable coin.

  3. This made me laugh:

    > But in general, the staking yield should be thought of more as the penalty rate for non-stakers than as the reward rate for stakers.

    and this:

    > The problem is, staking payments are not stock dividends, either in law or in practice. In fact, they are fundamentally different from dividends, because you actually have to do something to receive them. Namely, you have to engage in the business of staking your coins, in the hopes of making a profit at the expense of non-stakers, or at minimum, for the purpose of avoiding a loss.

    and this:

    > After-tax, you actually experience a negative real return because of taxation on nominal phantom income.

    Now that I have stopped laughing, taxes are a serious business, which is one of the reasons our stake pool services are an actual business, located in Wyoming.


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