Hi everyone, USA staking taxes have me scratching my head. Can anyone help me out with a strange scenario that I see as a potential tax trap?
What if ADA accrued in value over the year, only to tank later? What if the staker found themselves underwater? What if the tax burden for the year was higher than the staking rewards’ value at the end of the year? Is there a tax work-around? What would happen if people unstaked ADA to protect themselves against this trap happening to them?
Let’s say that ADA really takes off-- $10/ADA, for example, with staking rewards for most/all of the year taxed at the rate of $10 per coin.
FOR EXAMPLE – Say Sam staked 10,000 ADA and over the year earned 500 ADA rewards worth $5,000. The tax burden on these rewards would be $1,250 (using a 25% tax rate as an example).
BUT what if, at the end of the year, the price of ADA plummets to $1. Sam would be stuck with a $1,250 tax burden while the value of their rewarded ADA dropped to $500. If Sam intended on selling earned ADA to cover income tax, they would have to sell all 500 earned reward ADA plus an additional 750 ADA, leaving them with a smaller bag at the end of the year.
In this scenario, is there a tax work-around that would lessen Sam’s tax burden?
I have a long-term outlook for Cardano, but if ADA really started mooning, I would be tempted to unstake some of my ADA to protect myself against a possible crash. After all, altcoins have a history of crashing hard after the bull cycle peak, and so many people seem ready to “cash out” at some point. The problem here is that unstaking would have a negative affect on the network.
Any thoughts? Thanks!