Perhaps there could be more tax clarity if Stacks went further then what LN does: instead of sBTC having a separate Stacks address, it is has native segwit bitcoin addresses (per L Salibra) and keeps the symbol BTC when bridged. sBTC is not needed and just makes it look like wBTC, cbBTC et al.
LN does a good job of keeping BTC looking like BTC even though it is lnBTC. The wallet would handle the logistics out of sight of the user and also show this BTC as another address alongside their L1 BTC. The wallet would block L2 BTC from being sent accidently to an L1 address without including the peg out to L1 as part of the process.
I think LN would have been better off not having a separate address system. Maybe segwit was not available in the early design stage?
Would change of the symbol sBTC to BTC make favorable tax treatment more likely? Probably.
The IRS is clear that wrapping taxable. Here’s a pretty good AI breakdown of current understanding.
Thought Process from AI
Answer:
The tax treatment of moving BTC to Stacks’ Layer 2 (sBTC) is not definitively settled by the IRS, but based on current guidance and technical details from the search results, here’s the analysis:
Key Factors
sBTC’s Design:
sBTC is a 1:1 Bitcoin-backed asset on Stacks, designed to enable decentralized movement of BTC between Bitcoin L1 and Stacks L2 (Stacks FAQ).
Unlike custodial wrapped BTC (e.g., wBTC on Ethereum), sBTC is non-custodial, meaning users retain control of their BTC during the process (sBTC.tech).
IRS Guidance:
The IRS generally treats crypto transactions as taxable if they involve a disposition (e.g., selling, exchanging, or transferring to a new asset).
Custodial wrapping (e.g., BTC → wBTC) is widely considered taxable because it creates a new token. However, non-custodial bridging (like sBTC) is less clear.
Perception vs. Reality:
Perception: If sBTC is viewed as a “representation” of BTC (similar to Lightning Network’s lnBTC), users may assume no taxable event occurs (Stacks FAQ).
Reality: The IRS has not explicitly ruled on non-custodial L1→L2 transfers. However, because sBTC exists on a separate blockchain (Stacks), the IRS could argue that minting sBTC constitutes a disposition of BTC, triggering a taxable event.
Comparison to Other Solutions
Lightning Network (LN): Moving BTC to LN is often seen as non-taxable because LN operates as a payment channel (not a new token).
Ethereum’s wBTC: Custodial wrapping is taxable because it involves surrendering BTC for a new ERC-20 token.
I don’t believe this is doable. As a L2 token it runs on a different chain and calling it BTC would be a misrepresentation. Not only that, it would cause massive confusion.
As for the Lightning Network, it operates with native Bitcoin. It’s not a new token. Native Bitcoin is locked into the network which enables the opening of peer-to-peer channels to facilitate transactions between parties.
BTC on the stacks network
BTC on the lightning network
BTC on the L1 bitcoin network
they are all BTC.
No it wouldn’t. This is already how the existing financial system works. Your USD in paypal has entirely different risk characteristics than USD in a federal reserve account. They’re different tokens. But we generally call them the same thing. (People sometimes talk about “eurodollars” for USD held in non-US banks…they have different risk characteristics.
There’s already precedent for this in crypto. We called USDT “USDT” no matter which L1 or L2 it is on. USDT on tron is an entirely different token than USDT on etheureum.
I get your point, but there’s a reason other Bitcoin L2s like Liquid (LBTC) and Rootstock (RBTC) - not to mention wrapped Bitcoin (WBTC) - use identifiers with their token tickers, and that’s to prevent confusion when looking at coins on exchanges or apps like CoinMarketCap etc.
Beyond just the label, at the root of such confusion would be the address system itself. Each chain uses completely different addressing systems. Now, if Stacks was able to somehow enable Segwit Bitcoin address format - for funds both in and out - then that would certainly help.
That doesn’t prevent confusion, it increases it by increasing cognitive load.
Users have to know what these different tokens are. If they all are 100% interchangable/swappable assets then it would be more simple to call them all the same thing (same name). All exchanges and apps should endeavor to hide complexities that do not matter to users.
BTC on the Rootstock network (RBTC) and BTC on the Ethereum network (WBTC) or BTC on the Stacks network (sBTC)… they are all BTC and only the network where they reside is the difference. It would be easier for users to only have to understand and distiguish WHERE the BTC is going-to/came-from/resides-on… which network/blockchain. This is how USDT is handled and it seems it could be a good way to handle BTC “flavors” as well.
I see your point. So I guess the difference between these versions of bitcoin would be obvious when you came to deposit or withdraw, and were asked to choose which blockchain you want or need to use - as it is with USDt.
Thanks to everyone who joined the panel to discuss, give feedback, ask questions, and learn more about this SIP proposal.
-Thanks Haddy for being the coordinator “SIP Deputy” to help make it happen.
-Thanks Larry for taking his valuable time to creating this proposal to make Stacks even better, and feels more like operating on Bitcoin.
Next Step:
-Please continue to feedback & discuss about this proposal.
-Haddy will work with SIP author Larry to understand how he’d like to move the idea forward and provide support where possible.
