2021 Tax Reporting For Staking Rewards (USA)

Have you talked to, or hired a tax consultant as of yet? Are you in a highly tax-regulated state in the USA? I can provide what advice I have gotten on this exact question.

However, I will need to make it exceptionally clear/ explicit that what I share is not tax advice, is not financial advice, and is only what I personally have been told by my own advisors. You can infer, or use this at your own risk and on your own accord. I will not be held liable for any information I provide/ share. This (these) are only suggestions or what works for me in my situation.

My first question/comment will be this,

1.) Do you have an avg. Share (token) price for the ICP tokens you have purchased and staked? Keep that information readily in your documents for ICP. Continuously monitor and update the Avg. as you purchase or add

2.) on the NNS dapp you will now (after the maturity modulation updates) see a staked ICP that should now reflect the ICP you actually purchased (or included previously merged maturity if it was added to the stake prior to the new upgrades. See note at the bottom if you did have some from prior). This is where you take the average Token price that you purchased and, when you fully dissolve and disburse the tokens (& sell) you report you paid x (your avg. token price) for however many ICP you originally staked.

3.) you will now (after the modulation update) see the amount of ICP maturity. You can A. Auto-stake it into your neuron. B. manually merge the maturity to your Neuron or C. Spawn maturity to newly minted ICP.

A.1. Auto staking will automatically add maturity to your neuron (this will show on your neuron). Please note, however, that this option does not create a tax event according to my consultant in my area of the USA (which is highly tax regulated). Only when the neuron is fully dissolved and the newly minted ICP tokes are disbursed to me will it create a taxable event.

B.1. Manually merging is the same effect as auto staking except you manually add the amount of maturity you want (or all of it), just on your own not automatically each day rewards are disbursed.

C.1 Spawning maturity is a taxable event in my area (again highly tax regulated). If decide to spawn maturity you should report you paid $0 for however much is disbursed and minted from your maturity. For example, say I had 100 maturities and spawned it. I received 103.5 ICP when it was finally disbursed to my account. I would report I paid $0 for 103.5 ICP at whatever price you sell it at.

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4.) if you stake all of your maturity (either manually or auto) until the moment you fully dissolve your neuron you could reasonably not report any increase or maturity until the moment you sell them ALL and then you would simply say (again) you paid x for your original ICP (your average token price) and then paid $0 for however much maturity was disbursed to you.

For example, if I had 10 ICP and paid $4. My token price for those remains $4, then after staking I received 20 ICP in maturity. In total when my neuron fully dissolves I end up with 30 ICP and I sell them all. But wait! ICP price went up so my 10 at $4 is now 10 at $10!
I paid $40 for the original investment. Now, it is worth $100! So, I would report the increase on the ones I paid for ($100-$40=$60 profit), then I would say I paid $0 for 20 ICP which I also sold at $10 (20*10=200) so in total, I would report a gain of $260.

*note for ICP merged prior to modulation update. If you merged ICP prior to this update and have no clue how much you were given. You may be able to dig back in your records to determine how many you purchased and sent to your neuron(s) (possibly by looking at your NNS wallet and seeing how much and from which wallet you added to your stake). Get that original token amount and subtract the number you now see (after the update) that is how much ICP you originally invested. You can use the same style of calculation to determine how to report ICP already merged prior to the updates.

If none of this helps, please specify what exactly you are looking for in order to report. It sounds more complicated than it really is.

I highly suggest you seek a tax consultant. Honestly, H&R Block is not exactly what I would recommend. I suggest you find a tax attorney/ CPA in your area to represent all your interests and help you process these tax questions. They may cost a tad more than H&R Block, however, the services received are almost always more useful in the long term (a significant source of in-depth education on US tax code/ laws in your area/ ability to represent you should anything occur).

Please, do yourself the favor and not cheap out on the tax advice in your area. Even if you pay for one session (not advisable) just to have someone really look at your situation and tell you how to report maturity in your area. This is something I do not believe the ICP community can readily make available in a pre-filled form or even with a cost basis form. This is one of the things as stakeholders we are expected to do on our own accord. This is what has been told to me by others in the community in my own journey.

EDIT: here are some useful/relevant links

https://wiki.internetcomputer.org/wiki/Maturity_modulation

Another useful comment I thought might be worth mentioning is… If you do use maturity to spawn ICPs and then use those ICPs for say purchasing SNS projects or using them within the ecosystem. I would first ask your consultant how that will work in your area. This, along with any projects that may be seen as securities in the future, may develop issues with government agencies such as the SEC for example and thus I would again first consult with a tax attorney or consultant in your area to assure you are adhering to best practices for your individual situation.

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