Crypto Restaking: The Most Valuable Tax Minimization Strategy Youre Not Using
There are only two certainties in life and they dont need restating. But do they need restaking? Were talking taxes here not death, the other certainty that last time anyone checked, couldnt be offset through restaking. Tax, on the other hand, might just be. Due to the way capital gains are calculated in most regions, its preferable to avoid liquidating crypto assets where possible because doing so creates a taxable event.
Hold onto them, however, and while youll still be liable for tax on any yield those staked assets generate, you wont be on the hook for the underlying assets. Theyll remain tax-exempt, at least for the time being, allowing you to defer a big tax bill while capitalizing on the upside of being able to hold your crypto for longer.
There are many reasons to explore restaking, from supporting the decentralization of blockchain networks to scooping up those sweet staking rewards. However, in tax minimization, there may be an even more compelling reason to explore this fast-growing on-chain sector. Tax might not be avoidable in life, but if youre shrewd, it is at least reducible, and thats a start. Heres how it plays out when it comes to restaking.
Getting a Handle on Crypto Tax
A word of advice before we proceed: crypto tax regulations differ not only by country but sometimes even by region within a country. For this reason, the following strategy is intended for broad guidance only. To apply it to your own country, check the applicable laws that govern your tax code, or better still speak to your tax adviser. Hopefully, theyll also know their crypto, saving you from having to explain such concepts as staking and restaking.
Like other dreaded tasks, like cleaning the garage or visiting the dentist, calculating crypto tax is a chore that many are prone to putting off until the last minute. While crypto tax calculators have vastly simplified what was once a labyrinthine process, it would be stretching credulity to say that doing taxes is fun. But with a little forethought, it doesnt need to be stressful particularly if youre still holding the bulk of your net worth in staking protocols.
With restaking, you stake an asset such as ETH or BTC into a protocol to earn additional rewards while retaining the underlying token. On Ethereum, for example, EigenLayer enables restaking by allowing staked ETH or liquid staking derivatives (LSDs) like stETH or rETH to be reused across multiple networks. Mantle, an Ethereum Layer 2 network, uses EigenLayers restaking to secure its roll-up operations.
On Bitcoin, meanwhile, restaking is also taking off thanks to protocols built on top of Babylon, the leading decentralized BTC staking layer. SatLayer, one of the first restaking protocols built on Babylon, enables bitcoiners to stake their BTC and earn rewards for helping to secure other networks.
Given the vast potential for unlocking Bitcoins trillions of dollars in idle capital, coupled with the wide range of networks including EVM that can potentially be staked using the hardest crypto asset ever conceived, its evident that Bitcoin restaking will be huge. This brings us back to tax, unfortunately.
Understanding how restaking is treated under tax law can make the difference between a modest and a monster tax bill. Its not because restaking is tax-exempt, but rather because the act of doing so should leave you liable for capital gains tax only which is both lighter and later. But how does this work in practice?
Restaking Crypto: Maximizing Gains, Minimizing Taxes
From a tax perspective, the distinctions between staking and restaking are immaterial: the basic process is the same, regardless of whether youre staking a native L1 asset e.g. ETH or a secondary LST, such as stETH. In each case, the outcome is the same as far as tax agencies are concerned: you remain in possession of the underlying token, potentially benefiting from its price appreciation, while accruing extra rewards on top.
And its these rewards only that you should be liable for tax on during the calendar year. You dont need to be an accountancy whizz to figure that 30% tax on $10K of restaking rewards is going to be a lot less painful than 30% on $100K of underlying.
Restaking generally enhances your holdings through additional tokens, which can lead to compounding gains over time. However, the tax treatment of those rewards is crucial. In the U.S., for example, if staking rewards are viewed as taxable income upon receipt, you may owe taxes in the year you earn them. Later, if you sell those staking rewards for a profit, you incur capital gains tax on that difference. In the U.K., if considered income, staking rewards can be taxed according to your income bracket but upon disposal, any further appreciation is subject to capital gains tax.
Delay, Defer
One of the biggest levers crypto holders have for managing their tax liability is not selling their crypto assets prematurely. Restaking can be a powerful strategy for crypto investors seeking to grow their portfolios without incurring frequent tax events. By staking tokens like BTC or ETH, you remain exposed to potential price appreciation and accumulate additional rewards on top.
In many jurisdictions, you are not liable for capital gains tax until you dispose of the asset. By simply holding onto your tokens, you defer the point at which capital gains tax is triggered. From a tax perspective, that is essentially the bull case for restaking. It gives you a way to delay and defer your tax obligations. Leaving more money in your pocket or crypto in your wallet in the here and now. Which is never a bad thing.
Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.
Text source: Crypto Daily™
