Proof of Stake Alliance (POSA), a non-profit industry alliance, has published two white papers that examine the status of deposit tokens in the securities and tax laws of the United States on February 21. The papers were written by representatives of more than 10 industry groups.
Liquid staking is the practice on blockchains of using a proof-of-stake consensus mechanism to issue transferable receipt tokens to show ownership of staked crypto assets or rewards received for staking. These tokens are often referred to as liquid staking derivatives, a term that POSA rejects as inaccurate, suggesting they be called liquid staking tokens. Liquid staking has increased interest since the Ethereum Merger.
Although the US Treasury or the Internal Revenue Service has issued guidance on liquid staking, POSA noted in the “US Federal Income Tax Analysis of Liquid Staking,” but it must be subject to capital tax rules according to general principles. The paper says:
“Receipt tokens prove the ownership of intangible commodities in the digital world in the same way as warehouse receipts, bills of lading, dock warrants and other documents of title proof of title for real commodities in the physical world.”
In line with capital taxation, the argument continues, “the rules of liquid staking will be a taxable event only if there is a sale or other disposition of cryptoassets in exchange for properties that differ materially or extensively,” which is called the standard. as the “realization” of assets.
The reason is supported by the argument that the liquid staking protocol (smart contract) should not be considered as a separate entity, since it does not have another party to share the profits. “If the Liquid Staker does not have a taxable event as discussed above, the Liquid Staker must seek to tax the continued ownership of the purchased crypto assets,” he said.
In its “Analysis of U.S. Federal Law and Commodity Staking Receipt Tokens,” POSA said that determining whether a receipt token is an investment contract is a gating issue.
1/ Excited to see the launch of Liquid Staking White Paper @team_Posa. 18 months ago, the goal was to bring together leaders in the staking space to address some of the unknown regulatory and tax issues that could hinder the adoption of liquid staking. https://t.co/O77MpMPF3i
— Evan Weiss (@evweiss1) February 21, 2023
It supports that liquid staking is not an investment contract, and therefore not a security, using a small base analysis of the well-known Howey test. It then examines all four prongs of Howey’s test and concludes that the token is generally not met.
Related: Expect the SEC to use Kraken’s playbook against staking protocols
The paper also considers the Reves test, from a 1990 Supreme Court ruling that determines when an instrument is a “note” based on a “family resemblance” to an investment contract. The SEC and federal courts have found some crypto assets to be of record. Furthermore, the paper stated that token receipts are not swaps under the Commodity Exchange Act.
A receipt token serves a security purpose, allowing the holder to transfer ownership of the staked funds between wallets in the event of key compromise, and commercial purposes, similar to warehouse receipts, finished paper.
The paper is intended to offer “a framework for meaningful legislative codification or clarification,” according to an accompanying statement. They are also intended to provide the basis for self-regulation standards.