1/ The tax law uncertainty in the U.S. results in #Tezos baking/staking rewards being treated as income. Many bakers are then forced to sell some of their rewards to cover their tax burden, then diluting their participation in the proof-of-stake protocol.

Time for a thread

2/ This is one example of why the http://www.stakingtax.com  project that @abesutherland and @alliance_pos are working on with U.S. regulators is important. The correct policy is for these new tokens—like all forms of new property—not to be treated as income until they are sold.

3/ In 2020, the unfrozen rewards from my solo baker had an average price of about $2.39. Using a 25% effective tax rate, I’d have to sell 1.4% of my total staking balance to cover the taxes. That assumes I sold 25% of the rewards from all 128 unfrozen cycles throughout the year.

4/ Or if I wait until it’s time to pay taxes and the price of $XTZ is below the average unfrozen reward price of $2.39, the 1.4% dilution would go up proportionately. At the current price of $2.00, the dilution would be over 1.6%.

5/ If every baker/staker did the same, the dilution would be less concerning since everyone would be selling and reducing their staking balance. However, that would create massive selling pressure on $XTZ if everyone sold 25% of their staking rewards to pay taxes every year.

6/ The #Tezos protocol had over 40M new tez created in 2020, so that would be over 10M $XTZ sold just to pay taxes.

7/ The real world is less straightforward since you have bakers/stakers all over the planet with different tax laws and different levels of tax compliance/avoidance.

8/ Responsible bakers/stakers in countries that treat staking rewards as income end up with less participation in the protocol, due to having to sell a portion of their stake, than jurisdictions that either don’t tax rewards as income, or at all.

9/ Proof-of-stake networks like #Tezos, #Cardano, #Ethereum 2.0, and others are all subject to this. If countries want to be at the forefront of blockchain technology and adoption, encouraging innovation and clarifying the tax treatment of baking/staking rewards is paramount.