Some in the community seem uncomfortable with the idea that the Internet Computer will take time to succeed. They seem to think that we can tweak our way to success (I am speaking here of tokenomics/monetary policy). I believe this is folly.
Patience.
Since the Medium text by Dominic Williams back in January, I am wondering why Dfinity is getting involved with the US tax management for investors.
Is it the duty of a blockchain developer to manage taxes?
This blockchain is supposed to be decentralize and worldwide. Why caring about US tax?
What is the Tax expertise of Dfinity in order to do it the right way?
If you want the answer, keep reading this post. Of course this is only a scenario but it is a very very plausible one .
It is because of the 27 millions undisbursed rewards (still accumulating as maturity, but not getting compounded rewards) versus the 8 millions disbursed, resold or restake in the NNS. About 35 millions have been rewarded for NNS so far.
@Kyle_Langham was always wondering why so many neurons were not processed and kept as maturity. In a tweet last summer, I suggest it was probably for tax purposes. Clearly I was right then.
I assume these are whales (early investors who have paid anywhere between 4 cents and 70 cents per ICP) and they must getting frustrated to stay aside without the compounding advantages, thinking they wonât pay tax if they leave it as maturity. So they have pressure Dfinity to create a system where they can stay as maturity but be part of the compounding rewards. And here comes Dfinity to manipulate the system so maturity can compound everyday as well.
For this reason, this proposal will pass 100% sure because they represent 75% of the voting. They control Dfinity and IC.
Expect an important decrease (although the governance thing have increased it for many lately) in daily rewards due to their arrival in the everyday compounding.
Clearly to me this proposal is to get these whales to have their maturity getting rewards everyday while trying to avoid taxes.
Now, letâs be clear. Neither me or anyone here will decide how IRS will manage these rewards for taxes purposes. They donât even know themselves yet. Maturity is a nice trick they have never seen before and are probably not even aware of yet. Assuming it will not be taxable because we call it maturity instead of minting a new ICP is only a dream for here. One day or the other, they will get on this for sure. And this is when those dreams may reverse as nightmare if they ever win the case to get any form of rewards taxable at receipt instead of at selling, minting or maturity.
In all case, it is not Dfinity responsibility to manage this. But it will happen because we have no control. I can see Dominic have a lot of pressure to please them. I understand that. But still⌠This is happening so quick with so much priority. It is so obvious to me.
So this thread is useless as everything is all decided already. Rewards these whales while keeping their bag as maturity.
Of course IRS and many media will get in to this. This is so interesting for them. This is only then we will have all answers about what is taxable or not.
Sad but reality.
First, itâs not up to the IRS to determine what is considered a taxable event. Thereâs a tax code and there are judicial opinions that contain interpretations of the tax code. If the IRS says âwe think this is is a taxable event,â you can take them to court when they try to enforce their decision. My impression is that a group of tax lawyers reviewed the tax code and judicial opinions (quite possibly from many countries around the world, not just the US) and came up with a proposal that doesnât create a taxable event under the code. Could the tax code change? Yes. But that change would have to come from the legislative branch of government.
Second, why shouldnât Dfinity want a system that provides greater clarity tax wise for ICP token holders? If this proposal doesnât come from Dfinity (with the help of tax attorneys), where would it come from?
Third, you seem to be worried that your daily rewards will be reduced if the rewards that havenât yet been merged/spawned are eventually merged. But hereâs another concern for you: what if the people/funds who havenât yet merged their rewards decide to do so, but take out and sell half of their rewards to cover tax just in case merging creates a taxable event? Would you rather have slightly lower rewards or millions of newly minted ICP dumped on the open market?
Ben, donât get me wrong. My worry is a blockchain developer managing taxes for US. What about other countries? Why managing taxes?
This is what makes no sense to me. I am trying to understand why. Nothing else. And this is my personal conclusion.
Itâs not âmanaging taxes.â Itâs saying that the system as currently designed might potentially have negative, unintended tax consequences. And slightly tweaking the design of the system to remove those unintended consequences.
We should also remember that selling isnât inherently bad (especially in these early days). Good things come from selling ICP, such as ridding ourselves of people that donât believe in the success of the IC, decentralizing governance, and generally distributing the ICP asset.
Yes you are correct, the Gnomes of Zurich have made their decision.
With all the respect Ben.
You are right about IRS only applying the tax code. But IRS ask for all the change requirement they need to or want to and hope to get them.
I can only imagine you in front of a judge saying :We made a slightly tweak to our system so our people can avoid paying hundred of millions of taxes.
Some others want to see it as Tax Optimization. I was supposed to pay 10 millions of taxes but with that slight tweak, I avoid to pay all and pay zero taxes.
Do you really think they will see it as a slight tweak? Really?
Well, I respect how you guys think. I think differently and we both will not change our mind anyway
Although my question and concern is still why Dfinity are getting in to this. But I have my own answer now. Fine. Letâs vote and get it implemented because the vote will pass.
The consequences will come only in few years anyway
MAybe you guys should read what IRS think about Taxable Rewards. Read this below.
It does not talk about minted or maturity. It talk about reward is taxable. It is their position now.
You may interpret this to make you happy. But the reality may be different:
If you are actually interested in learning about the topic, there are far better sources for understanding what the law says. For example, here is an article from a reputable law firm: Taxation of Virtual Currency Staking Activities - McDermott Will & Emery.
I really appreciate your well reasoned, practical, civilized, and easy to follow explanation of your perspective on this proposal. This helps me a lot.
I believe the opposite is true. This proposal takes away the current staking/maturity system.
Thanks for this comment. I actually agree with your points in general. The concern I have is that the circulating supply is increasing too quickly. Approx 43% of total ICP is in the circulating supply, which has increased from 26% shortly after genesis. I simply think we are moving too quickly in the wrong direction on circulating supply and the primary cause is dissolving neurons. The tokenomics are intended to add stability while also incentivizing decentralized participation in governance. I prefer that we attempt to address this issue by tweaking the tokenomics in thoughtful ways, but I respect that you have a different opinion.
Do you take into account the effects these proposals will have on decentralization? If we want to become more decentralized, why would we want to keep the current dissolving neurons from fully dissolving and possibly being sold to a broader audience?
Based on all of the numbers Iâve seen newcomers are generally staking for 8 years and it looks very healthy. The most unhealthy part of this whole system IMO is the amount of original ICP held by a small number of people. If anything we want to encourage them to sell their stakes for the sake of decentralization. But proposals like this might encourage them to sell even less.
Wouldnât the proposed staked maturity function, along with further Community Fund development in support of ICP ecosystem investment, have a positive impact on regulating ICP circulation?
I think the signal that decentralization is improving will be when circulating supply is decreasing at a moderate rate instead of increasing at a high rate. I believe success attracts successâŚmore people will want to buy ICP and get more involved in governance when the current momentum on circulating supply and price both change in more favorable directions and the IC starts hosting major projects and businesses that provide high value.
I think I favor the staked maturity feature, but Iâm quite concerned about the exchange maturity feature. It seems to incentivize seed investors who have accumulated a lot of maturity since genesis to flood the market with ICP on a tax free basis. There is far more maturity from voting rewards available to be minted than what has been minted so far.
Iâm really looking forward to the Community Fund, but need to see more info published about it. That fund has a lot of potential to help regulate ICP circulation depending on how it is structured and implemented.
I agree with @lastmjs on this point. I think we need to stop trying to entice whales and just let the four year dissolve play out. We all know what the dissolve schedule looks like and Iâd say the market has absorbed it pretty well the last few months. We need to be patient.
âTraditional venture capital funds operate on a close-ended structure that involves creating a series of funds that open, invest, and close on a seven-to-10-year cycle. In this cycle, most initial investments are completed within the first three to five years of the fundâs life. The remaining time of the lifecycle is used as a harvesting period for the fund to make additional investments in existing portfolio companies. At the end of the fundâs lifecycle, returns are generated through a liquidity event.â
Source
What weâre seeing here is part of the normal VC cycle. VCs invested at a great time and price, and now are harvesting profits, which will be followed by a predetermined liquidation event. Attempting to fight/prolong this by bolstering rewards to these VCs/early whales in tempting them to stake instead of liquidate only puts more profit and control in the hands of the early investors and acts to centralize the IC. Compound this with the current crypto bear market and global macro issues, and it makes complete sense for VCs and larger investors to be making additional risk-off portfolio readjustments.
Historically, liquidity is vital to healthy markets, and while it is true that a flood of liquidity can lead to lower prices in the short term, a lack of liquidity can lead to crises and market panics. While promising, the IC is still in itâs early stages with a lot to deliver and prove, which means there is still a lot of risk associated with investment. Should we artificially incentivize people to take on more risk and lock up their tokens in the NNS by paying them out more, or should we allow the market decide what the appropriate risk to reward price should be in terms of the intrinsic value of the ICP currently + the extrinsic value of what buyers believe it will be in the future.
The types of investors that are attracted by short-term price movement are generally also short-term holders who are only motivated by âget rich quickâ price action. These âgamblersâ likely will not stake in the system for any considerable amount of time, and their primary concern will be making more money as soon as possible. Do we want voters with these priorities locked up in the NNS for 8 years?
I would imagine at this time, the investors who will buy and lock up liquidity during the crypto and ICP bear market are generally technical and/or entrepreneurial in nature and see the promise and benefit of the Internet Computer to society - these are exactly the investors we want to attract and who will stake for a considerable amount of time, not How to Get $100M⌠get 18,000 ICP first type of investors. While maybe not the case a year or so ago, Dfinity currently has a strong, and super positive PR machine - @diegop and the developer outreach and marketing teams are absolutely killing it in terms of attracting developers and entrepreneurs, and my personal opinion is that lower prices at this stage will further incentivize and accelerate adoption by this crowd, leading to quicker decentralization.
One final thought⌠When the foundation & members of the community try to incentivize staking by first boosting staking rewards higher than the sky high APY% they are already at, plus now compounding that with more incentives in this proposal - it has the opposite effect on me. It makes me question the project and financial incentives of those who have the most to gain or lose from these types of proposals and issues.
Thanks for the response, William. I greatly appreciate everything you are doing for the IC ecosystem, and Kyle Langhamâs data driven analyses are fabulous, so donât take what I have written as anything more than a difference of opinion from someone also concerned about ICâs long-term health. It is true that in specific cases, a lot of IC coming to market could drive prices low enough to lead to a death spiral. I think one of Kyle Langhamâs posts concentrates on this subject. My sense is that such short term threats, if indeed they are existential, should be dealt with using short term measures rather than changing fundamental tokenomics in a way that could compromise the long-term health of the system.
