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TAX CLINIC

situation, it is difficult to categorically asked questions pages (FAQs) in seek-
say with a high degree of confidence ing relief from penalties that provide
whether or not staking income should a reasonable-cause exception (see IRS Prior to the
ultimately be considered created prop- News Release IR-2021-202). While announcement,
erty. Digital assets represent a new asset taxpayers will still have to show that reliance on FAQs
class, and ultimately every analogy used such reliance was in good faith and was
to evaluate the proper tax classification reasonable based on all the facts and did not constitute
will break down at some point. However, circumstances, the announcement repre- reasonable
the income tax issues around staking sents a new era in penalty relief.
involve classic considerations of timing The change in the IRS’s position cause under the
various Internal
and character that tax practitioners have applies to all penalties that provide for
always had to consider. an exception due to reasonable cause. Revenue Code
Ultimately, at some point, taxpay- This includes the negligence penalty or
penalty provisions
ers will have to recognize income from other accuracy-related penalties imposed
“self-created property,” either upon under Sec. 6662(a), to the extent that that afforded a
creation or upon disposition; the key reliance results in an underpayment of
question therefore is timing. Taxpayers tax (see Regs. Sec. 1.6664-4(b)). In ad- reasonable-cause
who treat their staking rewards as cre- dition, FAQs that are published in an exception.
ated property would likely recognize IRS fact sheet that is linked to an IRS
income upon disposition of the rewards. news release are considered authority for
This income would likely not be con- purposes of the exception to accuracy-
sidered capital gain under Sec. 1221 and related penalties that applies when there these FAQs. These FAQs will be an-
therefore would be subject to the higher is substantial authority for the treatment nounced in a news release and posted
ordinary income tax rates. While a tax of an item on a tax return (see Regs. Sec. on irs.gov in separate fact sheets. The
deferral is usually desirable, in this case 1.6662-4(d)). prior fact sheet FAQs will be dated and
the ultimate tax liability may be signifi- The announcement envisions a maintained on the IRS website so that
cantly higher because of it, especially in two-tiered system for FAQs. The first taxpayers can confirm the dates when
light of the astonishing price apprecia- tier consists of significant FAQs relat- changes were made and locate prior
tion of some tokens over time. ing to newly enacted tax legislation, as versions that they relied upon. In addi-
Taxpayers should seek advice from well as any later updates or revisions to tion to FAQs relating to new legislation,
a professional tax adviser when deter-
mining which position to take relating
to staking rewards. Tax advisers will
need to carefully review the facts and
circumstances of each taxpayer before
advising how to appropriately report
staking rewards.
From Jamison Sites, J.D., LL.M.
(Jamison.Sites@rsmus.com), Wash-
ington, D.C., and Melanie Gulden,
J.D., LL.M. (Melanie.Gulden@rsmus.
com), Boston

Practice & Procedures
IRS to permit reliance on
frequently asked questions PHOTO BY OLIVIER LE MOAL/ISTOCK
On Oct. 15, 2021, the IRS announced
changes that allow taxpayers to argue
reliance on Service-issued frequently

22 April 2022 The Tax Adviser