Understanding Liquid Staking Tokens: Rebasing vs. Capital Gains
By AVADO team · Published
This is an archived article from 2023. Some details are out of date. For current information, see Ways to stake ETH compared.
Liquid staking tokens offer a unique approach to earning rewards in the crypto world. Let’s explore the differences between two fundamental concepts: rebasing and capital gains, through the experiences of Alice and Bob.
Alice’s Rebasing Token
Alice holds a rebasing token, such as Lido’s stETH. Her balance grows as staking rewards are added, while one token stays worth about one staked ETH.
Tax Implications for Alice
From a tax perspective, Alice’s rebased tokens could be considered income. This means that any increase in her token quantity might be taxed as ordinary income, depending on her jurisdiction’s tax laws.
Bob’s Capital Gains Token
Bob holds a token that doesn’t rebase, such as Lido’s wstETH. The number of tokens stays the same; each token becomes worth more ETH as rewards build up.
Tax Implications for Bob
For Bob, any profit made from selling his tokens at a higher price than the purchase price is subject to capital gains tax. This tax is typically lower than the tax on ordinary income and is realized only upon sale, offering potential tax planning advantages.
Conclusion
Liquid staking tokens and their tax implications can vary significantly. Understanding whether your token rebases or accrues value can help in making informed investment decisions and planning for potential tax obligations. Always consult a tax professional to understand the specific implications for your situation.
Liquid staking is one of four common ways to stake ETH. Ways to stake ETH compared sets it against solo staking, Rocket Pool and exchanges.