@wpb it seems as if you believe that if we tweak the tokenomics enough we’ll stop the extremely large dissolving neurons from dissolving, and that they’ll instead stake and thus not dump ICP on the market.
I hope comments like the one I’m replying to and the various others that myself and others have made are somewhat convincing that this will not be the case. Not only that, we may end up creating many unforeseen issues because of the tweaks, and still end up with those extremely large neurons dissolved and that ICP dumped.
I say let them dissolve. Let them do what they want with the ICP. If they choose to sell, let many more interested people come and take their place. Let’s decentralize ICP ownership and this governance power, not encourage it to stay in a few hands. And let’s be patient with this amazing technology that needs time to mature. If you need examples of how long similar technologies took to mature, study the history of Bitcoin and Ethereum since 2008.
Constantly meddling with the tokenomics foundations I’m afraid could be very harmful to the IC.
Really these types of conversations are the most worrisome to me, and that they keep coming up is a constant existential threat IMO.
@wpb please reconsider your assumptions and the means you are proposing, because I believe they could cause a lot more harm than you anticipate.
My understanding is that the proposal is aimed not towards preventing large dissolving neurons from dissolving, but instead to stop non dissolving neurons from being forced to sell their maturity indefinitely. For these people this problem will never go away.
I don’t think I made any proposals here. I’ve responded with my opinion and questions regarding a few features of this proposal and I have answered a few questions that were directed at me, but I’m just trying to figure this proposal out like everyone else. I’m trying to remain as objective as possible in my evaluation of the merits of this proposal and have been very impressed with many of the points made in this deliberation, including the one you referenced by @icme.
You beat me to it, @aaa10247. My understanding is that this proposal is specifically designed to deal with potential unintended tax consequences from the current design. That’s something that impacts all of us who merge. If a court ultimately determines that merging maturity creates a taxable event because new ICP is technically minted, everyone in the US who has merged will owe back taxes on the ICP that they merged. It could take years for that determination to be made, so it’s possible that if we continue to use the system we are using today, people in the US who merge constantly could face a hefty tax bill.
I personally think it’s likely that merging does not create a taxable event. But I recognize it’s quite possible that it does. And clearly some major holders agree that it’s at least possible.
When I mention the issue with selling, what I mean is that if merging is considered a taxable event, US investors will be forced to sell a large portion of their rewards to cover their taxes. Do we want a large portion of the daily rewards to be sold on the open market day in and day out? Is there enough demand for ICP to withstand that kind of sell pressure without ICP cratering further?
I’m referring generally to your advocation for changes to tokenomics (not just in this thread) based on what I assume one of your underlying motivations is, which is to stop the genesis neurons from dumping ICP on the market.
I hope you know I’m not trying to attack you personally or say you aren’t being objective nor a good-faith member of the community.
Just based on your comments and the conclusions I perceive you may be coming to, I just think they could be harmful. Really it’s the constant desire to change the tokenomics, I oppose that desire and think it’s harmful.
If I’ve mischaracterized anything please feel free to tell me. I just want the best system possible, as I hope you do as well.
Maybe we do, especially now. And such a focus on the short-term price action of ICP I think is unhealthy.
Let the current price of ICP crater! Let as many people as possible get in now and help us build a robust government for the IC.
The long-term demand for ICP, if the IC achieves the vision we all believe in, should completely dwarf any of the sources of demand that are present now (obviously there isn’t much demand now).
This isn’t focusing on the “short-term price action.” The issue of forced selling is a problem that will exist in perpetuity if merging maturity is in fact taxable. That said, there are consequences to ICP cratering further in the short term: namely, Dfinity’s treasury could dwindle. Given that Dfinity is the research outfit charged with doing research to improve the IC, and given that Dfinity is using some portion of its funds to help onboard developers, the dwindling of its treasury could have some consequences for the long-term term success of the IC. I don’t want to sound alarmist because I have no visibility into their finances, but it seems to me that there is certainly a price point for ICP where Dfinity suffers.
Edit: I’m editing to clarify that this is comment getting a little far afield. The question in my mind here is simple: should we tweak the design of the merge maturity function so that it doesn’t create a taxable event? I think we should. My primary reason for thinking that is that the change would provide greater clarity tax-wise for ICP stakers. My secondary reason is that I think it is unfair that the design of the merge maturity function means that it would not be taxable in some jurisdictions, but might be taxable in others: we should fix that. My third and final reason is that there could be unintended consequences if we don’t do this–namely that it could create sell pressure as people sell ICP to pay taxes on their rewards. This specific post deals with one of the several reasons that constant sell pressure is on my list of reasons why I support this proposal.
I agree it’s a risk if the price falls too far too fast in the short-term.
I just don’t think the way out is messing with the tokenomics as has been proposed.
The way out is to keep building and getting people to use the IC.
Instead of obsessing over the exact mechanics of ICP minting, focus on creating reasons to use ICP.
If ICP is actually valuable, meaning people have real reasons to want to own it, then its price will reflect that. Obviously the supply has to be kept in check, but I think the current tokenomics will do that in time.
Also, Bitcoin and Ethereum have long been subject to taxation on mining and staking rewards and they’re doing just great, if those two examples could possibly serve as useful case studies.
If the “merge maturity” function was originally designed so that merging maturity would not be taxable in any jurisdiction, but lawyers have since determined that the design may have failed to achieve that goal, do you think we should try to fix the design?
If the “merge maturity” function creates a taxable event only in some countries, but it can be fixed so that it creates a taxable event in no countries, should we implement that fix?
I personally think the answer to both of those questions is “yes.” Which is why I like this proposal.
From what I recall, Merge Maturity was a feature requested by the community so they wouldn’t have to manually spawn a neuron, wait for it to dissolve, and the stake it back in the neuron. I do not recall any discussion about be a way to avoid taxes when it was requested or introduced
It depends on the consequences of the fixes and if the fixes are actually possible. If we knew for sure that we could legally stop taxation then yes, assuming again that the fix didn’t introduce new undesirable consequences.
That’s the problem with the proposal. We don’t even know, and probably can’t know anytime soon, that it will work legally, and it introduces mechanisms that may end up making ICP staking undesirable because of its complexity, and our attempt to control when people mint may have other unintended consequences as we try to steer people’s choices based on market conditions instead of letting them choose for themselves what is best.
This proposal was almost certainly drafted in consultation with (or entirely by) tax attorneys who specialize in understanding what exactly the tax code says. I doubt they would propose this unless it were iron clad legally. That said, you are right that I don’t know whether the modulation will have negative consequences.
Well, if they actually told people what the treasury is composed of, how much was converted to fiat over the past few months, just basic stuff that a publicly listed corporation would be compelled to reveal, it would help the community make a better judgement on how problematic the fall in price could get. The community has, as you put it, no visibility on Dfinity’s finances, because the organisation has been obdurate and opaque about the matter. If they have enough fiat to tide over the current dip, no shift in tokenomics is needed.
In the longer run, ‘forced selling’ is the best thing that could happen to the IC ecosystem. It is the only way to decentralise, aside from neurons becoming tradable.
The discussion so far seems to boil down to 2 main questions: whether the proposed changes…
would in fact improve tax clarity;
are worth pursuing even if they would improve tax clarity.
In the background, there are broader questions whether:
we should be making fundamental tokenomics changes at all, since this introduces instability;
the process followed in introducing this proposal is “appropriate,” given prior community feedback.
Echoing much of what has already been said, I personally think that on all counts this proposal should be dropped:
Circumspect that this proposal would improve tax clarity - many tax authorities around the world, all motivated to get what they deem due, regardless of technical implementation.
Cost of proposal complexity and opportunity cost of Dfinity team’s time far outweigh potential benefits for the IC of tax clarity (esp. since by far most ICP supply growth right now is coming from dissolving neurons, not maturity sales - so unlikely to meaningfully reduce price erosion, if that’s part of the aim).
Instability in fundamental tokenomics likely to deter potential stakers, and interferes with developers looking to innovate on firm ground.
Proposal does not seem to reflect prior community consensus regarding priority of pursuing.
The DFinity foundation having enough money to ride out the current market isn’t the issue. I though this was more about the individual stakers who are at a tax disadvantage because of this ICP minting event.
I think it’s a fairly simple change to move from “here is a 10 ICP Neuron” to “here is a slight increase in voting power”, the difference whether they can be easily quantifiable as income.
I’ve spoken quite a bit, so this will be my last post on the topic for a while. But here are my answers to the two main questions you noted.
Would this proposal improve tax clarity? Tax liability is inherently a legal question. Laws state what is and is not taxable; tax agencies interpret those laws and try to enforce them according to the agencies’ interpretation; if a tax agency’s interpretation is called into question, the court system ultimately determines whether the tax agency’s interpretation of the tax laws is correct. Because tax is inherently a legal question, I find it a little head scratching that people in this thread have called into question whether the proposal provides tax clarity without actually citing any case law or provisions of the various tax codes. Instead, people just kind of assume that any attempt to read/interpret tax laws and design a system in accordance with those tax laws is futile. But companies do that all the time: they hire attorneys to figure out what the law says and then figure out how to operate within the confines of those laws. Dom’s post is full of legal conclusions that were clearly written with the help of tax lawyers, and (in my mind) are fairly persuasive. I see no reason to believe the proposed plan would not actually provide greater tax clarity.
Is it worth pursuing even if they would improve tax clarity? Tax clarity is incredibly important. If I make a determination that I do not owe taxes on merged maturity and a judge later concludes that I’m wrong, I owe back taxes on all of the maturity that I merged. Moreover, the amount of tax I would owe would depend on the price of ICP when I merged. Thus, if I merged maturity at $60/ICP and a judge determines that merging is taxable, I would owe taxes on that $60/ICP even though ICP is now worth $16/ICP and my ICP is locked up. In fact, I would still owe even if ICP (god forbid) went to $0/ICP: meaning that I can actually lose more than I originally invested.
To avoid that bad outcome, investors in jurisdictions (like the US) where there is tax uncertainty will either (1) merge some portion of their maturity and sell the remainder to cover taxes or (2) let their maturity grow. For investors, there are a few issues with choice number one. First, investors don’t want to have to pay taxes that aren’t actually due. Second, minting and selling new ICP creates tax issues for investors who use the FIFO system because they have to pay taxes on both the newly minted ICP and on the capital gains (if any) they have accrued since they bought their first ICP that they currently hold. Third, it reduces the incentive to buy and stake ICP because the rewards are lower than they would be if you could compound without actually paying taxes on the newly minted ICP. And finally, it creates constant sell pressure for the ICP token.
There are also issues with choice number two. If only a few jurisdictions might consider merging a taxable event, investors in those countries will be the only ones who don’t use the merge function. The issue that creates is that the staking rewards for people in those jurisdictions will be materially lower than the staking rewards for everyone else because investors outside of those jurisdictions will consistently increase their voting power by merging maturities. Do we really want a system that gives 25% rewards to 8-year stakers in countries where investors can merge without facing taxes consequences, but 18% rewards to 8-year stakers in the few countries where merging might be considered taxable? Seems inequitable to me–especially since its possible to change the system to fix that issue.
Exactly. I agree with everything you said. The write-up was very confusing and does not do a good job at explaining this to a normal person. It sounds to me like the proposal might be a good idea but the explanation of it is quite the opposite.
Let’s bring this back to the table for more discussion.