Possible Optimizations of NNS Tokenomics (Updated!)

[Accumulating.icp]

I’m also curious if you think the continuous intentional “avoidance” of taxable events will lead to longterm legal problems.

@Accumulating.icp

The Evasion of Taxable Events

While it may not have been intended, this mechanism directly evades taxable events.

This is due to the fact that the Neuron Fund can only draw from liquid Maturity, that could be spawned, but instead is utilized under the guise of “Maturity” - which is conveniently not tracked within either Blockchain Explorer (ICScan or IC Dashboard), or the NNS itself.

The lack of transparency presents two issues - being the inability gauge how much maturity was used in the sale, and how much is received from off-loading the position. Which in turn leaves all maturity to fall under the umbrella of a singular taxable event, being the spawning of staking rewards.

Utilizing the USA as the example jurisdiction (however, many jurisdictions apply similar laws), given the abundance of open court cases against DFINITY within the region, the following taxable events are directly evaded;

1. Spawning of ICP Rewards
2. Conversion of $ICP to Token
3. Spawning of rewards from SNS Tokens
4. Conversion from Token to ICP

I’d also be willing to make the arguement that Maturity Modulation only exists to avoid Switzerlands “Wealth Tax”, but that is another topic.

@dominicwilliams

PROPOSAL 2: Swapping locked ICP for unstaked maturity.

You should always get your own tax advice, but, by design maturity is an attribute of a neuron, not a cryptocurrency that lives on a ledger like ICP that can be transferred and sold. Furthermore, the amount of newly minted ICP that a neuron can produce by applying its maturity is indeterminate, and subject to modulation by external factors like price trends, and even updates to the NNS, further indicating that maturity is part of the value of a neuron and has indeterminate value.

This design means that when a neuron gains maturity, this is not realized income (again get your own advice). However, it is hard to argue that when the owner of a neuron uses its maturity to produce new ICP by spawning, then this represents the generation of income, since the newly generated ICP can be transferred and sold, and has a more-or-less determinate value, and in most jurisdictions (unless you live in Monaco, UAE, Puerto Rico, etc) income tax will be due on the new cryptocurrency you have produced.

The maturity of voting neurons increases near continuously, and its nature arguably provides administrative advantages compared to traditional staking, which regularly pays out cryptocurrency, forcing constant accounting. Nonetheless, there are some disadvantages.

Perhaps the largest one is that maturity is an attribute of a neuron, and not a cryptocurrency! This means that it can’t be used in things like DeFi. There is a lot of maturity sitting on neurons that might usefully be deployed if it were unlocked ICP! We might try to fix this.

Outline of proposal: When a neuron has unstaked maturity, then the owner can swap that unstaked maturity for ICP that is locked inside i.e. such that the unstaked maturity becomes locked inside, and the ICP is freed (currently maturity can already be staked, so this is not a big leap).

Example benefits:

1. Unlocking your pre-existing ICP is tax neutral, so the owner could, for example, transfer the newly unlocked pre-existing ICP into a DeFi service and borrow against it. This might unlock more liquidity for DeFi.
2. If a neuron owner needs to realize x fiat gains for a financial purpose, they could sell their newly unlocked pre-existing ICP, paying capital gains, rather than applying maturity to generate new ICP for sale, which is subject to income tax. Since in e.g. in places like the UK, capital gains is 20%, while income tax 50%, this would make it possible to sell less ICP to realize the required fiat gains. This might result in less forced sales.
3. If a neuron owner wishes to have unlocked ICP to swap for some other token, and would otherwise have to apply unlocked neuron maturity to produce new ICP, then benefits as per advantage (2) above.