RocketPool Taxable Events

Right now I’m staking some ETH with Coinbase, but don’t want to lock all of it up there currently. My stack is not quite big enough to run a validator myself, but that’s my end goal. In the meantime, while I’m trying to accumulate more ETH, I’m thinking about running a mini node and then some with RocketPool.

However, here’s where my trepidation comes in. The swap of ETH to rETH (and back again) will be considered a taxable event. At this point it would be long term gains for me, so not too bad, but my cost basis is pretty damn low. It won’t be the worst, but it will still be a not insignificant tax bill.

Ultimately, I’ll have to crunch the numbers to see if RP staking will be right for me, but those taxable events are keeping me hesitant for now. And as ETH continues the upward trend, that event is getting even more and more expensive from an absolute value standpoint. What’re everyone else’s thoughts on this? I’m in the US, btw.

Edit: u/Fast_Contract pointed out that I was incorrect in part. rETH is needed for stakers, but not for node operators. However, node operators get rewarded in nETH, which still seems to me like it may be taxable when swapped for ETH, in addition to the reward income itself being taxable when it’s received.

What do you think?

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  1. With respect to rETH, it’s a complete gray area in the US on whether or not that is a taxable event. So I can’t confidently say that you won’t have to pay tax, but it’s also not possible to confidently consider it a swap. It’s a similar idea to AAVE and Uniswap LP in that the “swap” you’re doing is for a token that is simply a representation of your stake. In other words, there is an argument to be made that you’re not actually getting rid of your ETH, you’re just staking your ETH and the rETH is what represents your stake and is used to claim your staked ETH + rewards. If you try to use the rETH for DeFi gains by putting it into other protocols, that would surely be messier for taxes, though.

    And I know the idea of supporting the Ethereum network’s decentralization isn’t incentive to earn less money, but RocketPool is the ONLY place where you’ll be able to safely maintain ownership of your ETH/rETH, support decentralization of Ethereum, and still earn one of the most (if not THE most) competitive rates. It will depend on the equilibrium of the network, but will likely have 10% or less commission on your passively staked ETH earnings.

  2. A while ago I asked about this, and was under the impression that running your own 16 eth node didn’t require a swap to rETH, that your 16 eth contribution would remain eth. Has that changed?

    I thought it was only if you had less than 16, and weren’t running your own node that you had to swap for reth?

  3. As someone that has worked in Individual tax for 6ish years now, I’ll say that I agree with a lot of people that if I had to bet, I think the IRS will come out with guidance stating it is NOT a taxable event.

    That being said, if I was advising a client right now, I would say until the IRS comes out with guidance on that kind of transaction to either hold off doing it or report it as a taxable transaction.

    Based on the assumption a lot of people in your situation have a large amount of ETH with a relatively low basis, you do not want those penalties and interest accruing if the IRS decides the other way and serves you with a notice 2-3 years later because you didn’t report.

  4. It gets worse…

    – To set up a minipool you have to tie up at least 10% in RPL, so you have to purchase RPL for ETH, ETH that you could have instead staked, already eating into your returns. You are also taking on risk of RPL falling against ETH.

    There is more…

    – To set up a minipool you have to do a lot of transactions costing a lot of gas. I have calculated how much a setup of a node with two minipools costs – over 4 million gas. At the current gas price of 250 gwei you are looking at 1 ETH in setup fees. That is almost half a year of staking returns on those 32 ETH staked.

    Last but not least…

    – The minipool provider is rewarded with RPL, that RPL has to be claimed each month, otherwise it is forfeit. That claim is again done by calling a contract, again incurring gas costs. Over the year you are again, with the current gas cost, looking at around 1 ETH in total in gas costs.

    All in all, unless the gas prices fall substantially, it makes very little sense to become a minipool provider.

  5. This is what made me decide against RP and any other platform that requires a swap.

    Hell I read the other day that even Coinbase “ETH2” may be considered an exchange. There’s no way I’m going to pay the gains tax to switch ETH to ETH. I may have to wait until it’s all merged.

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