Staking With Rocket Pool in Germany: Taxes, Rewards, rETH

Various providers of Ethereum staking pools have recognized this problem and created solutions for investors who have less than 32 ETH yet still want to achieve returns through staking.

A well known provider is Rocket Pool. This is a decentralized staking pool solution that uses smart contracts for the required processes. This creates a decentralized network of node operators, in which each node operator is a separate entity with its own server infrastructure.

With Rocket Pool, validators only need 16 ETH to act as a validator. The remaining 16 ETH that the Ethereum protocol requires for validators is provided by a common staking pool.

The staking pool is composed of a large number of ETH amounts deposited by retail investors. The creation process is thus completely decentralized through automated smart contracts. These newly created validators (minipool) do not differ in any way from a "normal" validator outside of the Rocket Pool protocol.

Stakers in Rocket Pool who do not operate a Rocket Pool node contribute any number of ETH (minimum 0.01 ETH) to the staking pool.

In return for the amount of ETH they have staked, investors will immediately receive rETH tokens. This token indicates the amount of ETH submitted to the pool and at what time. At the same time, the received rETH tokens represent the staking rewards that are earned through staking over time.

For example:

Person A puts 10 ETH into the staking pool and receives 10 rETH in return. A total of 100 ETH were staked with Rocket Pool. After a few years, the total number of ETH2 on the Beacon Chain increases to a total of 124 due to the rewards received from the validators.

For 1 ETH, the value of 100/124 = approx. 0.8 rETH is then achieved. Conversely, this means that 1 rETH (124/100) = 1.24 ETH in value. If person A exchanges their 10 rETH for ETH, they receive a total of 12.4 ETH. This results in a gain of 2.4 ETH for A in the example.

Staking via Rocket Pool offers many advantages:

• Stakers, for one, do not need to overcome the hurdle of a total of 32 ETH. Rather, staking is possible even with the small amount of 0.01 ETH.
• In addition, stakers on Rocket Pool can freely dispose of the received rETH and use it for other purposes (e.g. trading or lending through DeFi applications such as Uniswap). 
• Additionally, there is an option to exchange the received rETH for ETH if sufficient resources are available for this in the staking pool. In traditional staking with Ethereum on the Beacon Chain, stakers cannot, on the other hand, currently access their deposited ETH and the rewards they have received (only when withdrawals are brought in via the corresponding EIP).
• Moreover, Ethereum stakers usually need to have some technical know-how, as they must permanently run a special validator software on their computer in order to receive staking rewards. Pool stakers who do not operate their own node are exempt, as they are only required to deposit their ETH for staking but do not need to attend to the proper maintenance of a node.

Thus, Rocket Pool offers a comparatively user-friendly alternative.

Penalties incurred due to a malfunctioning node are distributed across the entire Rocket Pool network. Thus, no single user bears the entire full risk, but rather all users of Rocket Pool only partially bear the risk.

For stakers who work with Rocket Pool but do not operate their own node, i.e. also staking with a small number of ETH, the exchange of ETH in rETH first represents a fiscally relevant event. Since this is a private sale transaction (Section 23 Para. 1 Clause 1 No. 2 of the Income Tax Act, EStG), any gains accruing are taxable if the holding period for the deposited ETH has not yet expired.

If the rETH are exchanged for ETH at a later date, this is also a starting point for taxation. The increase in value of the rETH tokens will then be taxed when they are exchanged for ETH, if the holding period for the rETH tokens has also not yet expired in this case.

The special features of staking with Rocket Pool offer their users several advantages. Thus, they may be able to realize tax-free gains by taking advantage of the holding period. Stakers also do not have to fear a holding period extension of ten years for their received rETH tokens.