How to Stay Legally Compliant While Staking

Staking and getting involved in the Web3 ecosystem represents a fantastic opportunity to earn passive income and be part of one of the most exciting movements of our time. Yet as a result of the nascent nature of this landscape, people often find themselves unsure of the legal ramifications of taking part. While this article does not provide legal or financial advice, it does round up the legal considerations that you should keep in mind when staking.

Staking is legal across most of the world

We often find that people are unsure if it is legal to stake Web3 projects. This uncertainty is largely the result of the fact that the Web3 ecosystem has long been part of an unregulated grey area. The fact of the matter is that the advent of blockchain technology in 2009 spawned a sudden boom of technological innovation and business ventures that left regulators around the world playing catch-up. As a result, there is often a lack of clear guidance on how users should conduct themselves in this landscape.

In addition, many countries around the world have gone back and forth on banning cryptocurrency mining, often citing the power consumption of Proof of Work (PoW) networks. For instance, a proposed draft provision in the EU’s new Markets in Crypto Assets (MiCA) framework aimed to limit Proof of Work cryptocurrencies like Bitcoin. While the European Parliament’s economic and monetary affairs committee ultimately voted against this measure, it nonetheless reflects a negative regulatory sentiment towards Proof of Work that has left some people mistakenly believing that taking part in the Web3 ecosystem is legally forbidden.

Fortunately, Proof of Stake (PoS) — the protocol that staking supports — uses far less energy and has received a much more positive reception from regulators. Right now, in the European Union, North America, and Australia, there are no laws inhibiting people from staking and accessing the potential of Web3 projects. Better still, there have not been popular movements among regulators that are adversarial to the growth of this exciting space. In fact, many governments around the world are even getting involved in Web3. For instance, it was recently announced that the UK is minting its own NFT.

Pay attention to your jurisdiction’s tax obligations

While taking part in staking is legal virtually everywhere in the world, it is important to know that the passive income you earn through staking may be taxable. Ignoring your staking tax obligations is a common mistake that can often result in an unexpected bill next tax season.

In the United States, the trade or sale of staking rewards (cryptocurrencies) is considered a taxable event. Yet, there is uncertainty about how accrued staking rewards should be taxed. According to HTJ.TAX, the IRS is yet to issue clear guidance in this area. One case that has caught widespread attention from the Web3 community is Jarrett v. US, which is often cited as an indicator of the tax rules that currently apply to people in the US.

In Joshua Jarrett’s case, he and his wife paid income taxes on the 8,876 Tezos tokens that he earned staking. They later requested a refund from the IRS, arguing that these tokens are not income subject to tax. While their request was initially declined, they later sued and were offered a refund by the U.S. Department of Justice. Jarrett and his wife are now hoping to prompt the IRS to clearly define the tax laws for staking rewards by continuing to pursue the case in court.

While this issue may sound complex, the takeaway here does seem to be a positive one for the Web3 community. With the Jarrets’ already having been offered a refund (plus interest), and the trial set to take place in the near future, we may soon see a more clear and easy-to-navigate tax landscape emerge in the US.

Meanwhile, many countries in Europe have offered much clearer guidance to stakers. Some great resources to check out include articles by WINHELLER Attorneys at Law & Tax Advisors (Germany), Altermès (France), Koinly (Spain), and Unbiased (UK).

These laws are constantly developing as lawmakers attempt to both modernize old monetary policies and introduce new rules for digital earnings. As a result, the guidance surrounding the money you earn from staking is constantly changing. To avoid falling behind, it is important to follow the laws regarding taxable income in your region and do your best to stay up-to-date on developments in the space.

Work with experts and reputable services

In order to unlock the full potential of the Web3 landscape without hassle, it is helpful to work with experts and reputable providers in the space. For instance, if you are finding difficulty navigating crypto tax laws, it may be worth consulting a tax professional.

At the same time, when you are setting out to start staking, it is important to make sure that the service providers you are interacting with are acting in accordance with their own legal obligations as well. In the past, some cryptocurrency exchanges have been found to be acting against the legal requirements that applied to them in their jurisdiction — putting their clients in unnecessary risk.

By instead using a reputable service provider, you can ensure that your experience in the Web3 space is entirely above board. This will give you peace of mind while still being early to reap the benefits of this exciting movement.

AVADO offers legal and easy-to-use devices

AVADO is a legally-compliant business based in Zug, Switzerland. As experts and proponents in this space, you can rest assured that AVADO will help you enjoy an easy and safe Web3 journey.

We’re motivated to give users of all backgrounds — even those without existing financial or technical knowledge — the ability to take part in the Web3 ecosystem. To do so, we’ve released a range of plug-and-play blockchain devices that will allow you to start staking right away. Better yet, our product range caters to different types of users. Browse our range to find the perfect blockchain device for your needs.

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