RW form and staking, many doubts about recent guidelines from the Italian tax authorities
By Luciano Quarta - The Crypto Lawyer - 23 Sep 2022
With the three responses to interpello No. 956-448/2022, 957-221/2022 and 956-771/2022, the tax authority, in addition to the issue that pertains to the obligations of monitoring and filling out the RW form, has addressed the issue of the framing for tax purposes of the income that can be obtained as a profit from staking activities.
In this case too, interpretations leave room for much doubt.
In the cases addressed in these two responses to interpellations, the taxpayers (a platform and a user, respectively) submitted a question to the IRS on how income that is received as consideration for staking activities should be framed.
It should be clarified that for the purposes of the question, staking activity was understood to be the locking of held cryptocurrencies that the platform would then employ in the actual staking process, aimed at achieving Proof of Stake, in return for a "reward."
Technically, as is well known, the size of the "reward" that is disbursed as a result of staking is variable and is conditioned by a number of factors: one of them is the overall amount that is made available to the process, but also the choice of the specific blockchain in which the tokens put into staking are placed is a decisive variable.
Now, in the interpretation given by both the platform and the user, the proceeds earned should be qualified as miscellaneous income, therefore, falling under Article 67, co. 1, letter c-ter) and co. 1-ter, of the TUIR (the Consolidated Income Tax Act, under Presidential Decree No. 917/1986). In doing so, it is essentially accepting the idea that cryptocurrencies should be equated with foreign currencies (an argument that lends itself to much criticism) and assuming that the proceeds derived would be treated as capital gains generated by them.
The Italian revenue agency, however, sees it differently.
The view of the Italian revenue agency: RW form and staking income
Doubts about how to deal with the taxation of staking, inherent in the filling out of the RW form
First criticism
Second criticism
The contradiction of the Italian revenue agency
After publishing the first part inherent to the comments and clarifications of the compilation of the RW form, this article will deal with the second part of the analysis.
According to the Italian tax authorities, this type of income should be framed in the type of capital income, which find their regulation in Article 44 of the TUIR, and in this specific case, in paragraph 1 letter h).
According to the tax authorities, this type of income should be qualified in the same way as:
"interest and other income derived from other relationships having as their object the use of capital, excluding relationships through which positive and negative differentials can be realized in dependence of an uncertain event."
In support of this qualification, the response to interpellation cites an earlier circular, No. 165/E/98, which is rather dated.
The essential point the thesis supported by the tax authorities would be that it is not necessary for the income produced to be determined or predeterminable, and this would include income that is not linked to pre-established parameters, because the existence of any relationship involving the use of capital would be sufficient, regardless of a link with a consideration nature between the grant for the enjoyment of capital and the income earned.
The consequences of this interpretation are quite significant because it implies that taxes are not paid, as is the case with capital gains generated from cryptocurrency exchanges, if there is attainment of minimum thresholds (the capacity on the accounts of the famous 51,649.69 euros for 7 continuous days) and cash-out transactions, i.e., conversion into fiat currency, spending, etc.
If this type of approach is followed, taxation takes place on the income, with withholding applied by the platform on any income accrued as a result of staking.
Needless to say, this type of interpretation has a significant impact on taxpayers, both in economic terms and in terms of reporting requirements.
It is to be expected that, in the wake of the IRS's guidance, many will end up complying. Very few voices of dissent have been raised on the qualification of staking income as capital income according to the reconstructions of the Internal Revenue Service.
Almost all publications specializing in taxation, but also on crypto issues, have limited themselves to reporting the guidelines without making critical comments.
Lots of uncertainty about how to deal with cryptocurrency staking income
The argument that staking income would be capital income has numerous downfall points.
The first is the assumption that tokens or cryptocurrencies contributed in staking can properly qualify as "capital."
There is often a tendency to treat a cryptocurrency transaction in the same way as a financial transaction but, especially when certain types of tokens are used that have a pure or predominant function, such as utility tokens, this approach can be seriously questioned.
Naturally, it does not help that there is no specific notion of "capital" for tax purposes, let alone the fact that even in economic doctrine the definition of capital is one of the most controversial: the various schools of thought, such as the classical one, of Adam Smith and John Stuart Mill, provide very distant definitions, for example, from the notions conceived by Marx, Carl Menger or J.A. Schumpeter and Waltras.
All of them, however, place at their base a financial or monetary connotation that does not always and does not necessarily fit the nature of the tokens that from time to time may be employed in a staking operation.
In a nutshell, to say that indiscriminately all staking transactions or a particular staking transaction constitutes a form of "use of capital," which is a prerequisite for the application of Article 44 TUIR, is not something that can be done in a couple of words, as the Tax Administration has done, which in the two practice documents assumes it to be taken for granted and even implicit.
But there is a second, and even more significant, downfall of the reasoning, which constitutes a serious obstacle to the attraction of staking income into the sphere of capital income.
This obstacle lies in the passage in Article 44 which states that the scope of capital income is::
"excluding relationships through which positive and negative differentials may be realized in dependence of an uncertain event."
This type of issue is in fact circumvented by the Italian tax authorities through the reference of Circular 165/E/98, in which an attempt is made to broaden the scope of application of the rule on capital income by also including income received on the basis of relationships that give rise to a return of a variable nature, regardless of whether the income is predetermined or predeterminable, and even, regardless of any form of correspondence between the capital employed and the income accrued.
However, staking, in addition to the many variables related to the type of blockchain and the nature of the contractual arrangements with the platform to which tokens or cryptocurrencies are contributed, has an inherent component of randomness that the IRS, in the practice documents reviewed, seems not to have taken into account at all.
On a theoretical level, it is not at all certain that, by participating in a staking activity, one will come to achieve the token reward.
What may lead to the reward in favor of a particular staker, in fact, takes the form of a future and uncertain event, the outcome of which depends on the competition between stakers in the validation process known as Proof of Stake.
If this assumption is correct, and it certainly is, then the contractual relationship between user and platform, through which a positive differential (to use the expression contained in Art. 44 of the TUIR) can be realized, depends on what according to the law is qualified as an "uncertain event."
This implies that the income thus accrued must be considered by law to be excluded from the notion of capital income.
Even in addressing this issue, the Italian revenue agency thus provides guidance that ends up overlapping with the legislative dictate in a contradictory and inconsistent manner.
The problem is that through the "creative" interpretations of the tax authority, real wounds are inflicted on the regulatory fabric and the relationship of loyal cooperation with the taxpayer is also undermined.
With practice documents such as those examined, tax obligations are in fact imposed that are not explicitly and clearly provided for by law and, in addition, they are modulated at will.
This results in an arbitrary exercise of what should be merely enforcement functions in the hands of the Administration, and one ends up silently trespassing into the realm of the legislative function, given that in tax matters, it is only the legislature that can establish the boundaries of tax obligations.
Practitioners (tax lawyers, accountants, tax consultants) are now accustomed to these "creative" and additive practices of the Tax Administration, not only in the domain of cryptocurrencies.
They are clearly more frequent when the relevant legal framework is lacking or difficult to interpret.
And this is the reason why, despite the imminent adoption of European regulations (which do not deal with the fiscal sphere, which is reserved for member states when not dealing with harmonized taxes, such as VAT), the adoption of specific tax legislation for virtual currencies is urgently needed.
The intervention of the legislature, long insisted upon, never happened.
We will see what the new legislature will bring, but there are no signs that allow for optimism.
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Luciano Quarta - The Crypto Lawyer
Luciano Quarta, tax lawyer in Milan, managing partner and founder of the tax law firm QRM&P, has published extensively on the legal and tax aspects of legal tech, artificial intelligence and cryptocurrencies. A speaker at numerous conferences on the subject, he writes the column "Tax & the city" for the daily newspaper "La Verità" and regularly writes for the Economy and Taxes section of "Panorama". He is a member of the Tax Justice Commission of the Milan Bar Association and is the contact person of the Milan office of the interdisciplinary association for the study and application of artificial intelligence GP4AI (Global Professionals for Artificial Intelligence).