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bip-02-tax-efficiency-weather-changes.md

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BIP-2: Capital Gains Tax Efficiency Improvement and Adjustment to Weather Changes

Proposed: November 4, 2021

Status: Passed

Link: GitHub PR, Arweave

Summary

  • Change the structure of Pod harvests and Withdrawal claims to improve tax efficiency.
  • Adjust the 4 Weather Change cases when $P > 1$, the Pod Rate $R^{D}$ is above the optimal level of debt $R^{D^*}$, and demand for Soil is steady or increasing.

Problem

The current structure of harvest and claim transactions is potentially inefficient from a tax perspective in instances where the funds are immediately redeposited or resown in Beanstalk. Currently, in any harvest or claim, the assets harvested or claimed are first sent to the transacting wallet, and then sent back to Beanstalk. A member of the Beanstalk community with an accounting background suggested this could potentially be viewed as a taxable event.

The current Weather Changes are suboptimal for the current state of Beanstalk. In general, the Weather Changes are set in a conservative nature: Beanstalk would prefer to regularly pay a higher than necessary interest rate to attract creditors in a timely manner than regularly offer too low of an interest rate, fail to attract creditors, and enter a negative feedback loop. When the debt level is greater than $R^{D^*}$ Beanstalk is particularly conservative in its Weather Changes. Now, as the price has once again started to oscillate more closely around $1 even with a higher than optimal debt level, it is an appropriate time for Beanstalk to be slightly more aggressive in lowering the Weather when there is steady or increasing demand for Soil with P > 1. This will allow Beanstalk to gradually lower the Weather as appropriate while it lowers the Pod Rate.

Proposed Solution

We propose modifications to Beanstalk so that Beans from harvests and claims that are immediately reinvested into Beanstalk no longer touch the transacting wallet.

We propose the following adjustments to the Beanstalk Weather Changes in the cases when $P &gt; 1$ and $R^{D^*}$ < $R^D$:

  • When the demand for Soil is steady, the Weather Change is -1% (previouly 0%).
  • When the demand for Soil is increasing, the Weather Change is -3% (previouly 1%).

BIP Technical Rationale

There is no technical reason not to make tax efficiency modifications. We were happy to oblige the request from the community to propose this modification. This also provided an opportunity to make minor gas improvements to certain transactions by wrapping ETH into WETH to avoid unnecessary gas fees.

Beanstalk is implemented to support simple alterations to the Weather changes. There are no technical modifications necessary related to the Weather Changes.

BIP Economic Rationale

Taxes potentially incurred from gains in participating in Beanstalk may translate to sell pressure at some point down the road: Farmers may sell Beans to cover their tax liability. Therefore, improving the tax efficiency of Beanstalk creates a better risk/return profile for using Beans and puts Beanstalk in a more competitive position moving forward. There is no benefit to maintaining transactions with suboptimal structures from a tax perspective.

The ability to modify the Weather Changes without modifying any other feature of the general economic structure of Beanstalk allows for clean and targeted modifications to the Weather that has a stronger effect over longer periods of time. Weather Changes can be adjusted as needed depending on the Current State and environment of Beanstalk.

Current State: Because Beanstalk has high Pod and Soil Rates, and a high Weather, there will likely continue to be a higher than optimal debt level for the foreseeable future. Accordingly, adjusting the Weather Changes in cases where P > 1 and $R^{D^*}$ < $R^D$ to be more aggressive in lowering the Weather when demand for Soil is Increasing or Steady will allow Beanstalk to lower its cost to attract loans without decreasing its ability to create Bean price stability at $1.

Environment: The Weather changes are appropriate now that Beanstalk has stabilized the Bean price around $1. The increase in stability allows Beanstalk to be more aggressive in lowering the Weather when demand for Soil is steady or increasing. Limiting the changes to cases where demand for Soil is steady or increasing maintains the overall conservative nature of the Weather Changes while allowing Beanstalk to be more aggressive in specific instances.

Effective

Effective immediately upon commit.