US Tax Authority Says Income From Crypto Staking Rewards Taxable When Received

Updated: 01 August 2023

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The Internal Revenue Service (IRS), the top US tax authority, has issued fresh guidelines that say earnings from crypto staking rewards are taxable when received.

The move from the IRS offers much-needed clarity on crypto taxation rules. Under the new IRS ruling, crypto investors are required to report staking rewards as gross income in the year they receive them.

This marks a significant departure from previous years, where taxation could be deferred. This means, in practical terms, that if a crypto investor ‘stakes’ a cryptocurrency and, in turn, receives additional tokens as rewards, these new tokens must be declared as income in that same tax year.

Scope of the new IRS Ruling

The new IRS ruling applies to fiat-method taxpayers who earn cryptocurrency as remuneration for validating transactions on proof-of-stake blockchains. More importantly, it does not distinguish between staking activities performed directly by the investor or through centralized crypto exchanges. Hence, whether an investor stakes their crypto assets on their own or via a platform like Coinbase, the income earned from staking must be declared for taxation purposes in the same tax year.

The ruling further mentioned, “The fair market value is determined as of the date and time the taxpayer gains dominion and control over the validation rewards. The same is true if a taxpayer stakes cryptocurrency native to a proof-of-stake blockchain through a cryptocurrency exchange and the taxpayer receives additional units of cryptocurrency as rewards as a result of the validation.”

Reactions to the IRS Ruling

In an exclusive interview, the Head of tax at crypto tax firm Koinly, Danny Talwar, explained that crypto rewards that are accrued and locked would not be taxable unless the reward owners gain ‘dominion and control’ over the rewards i.e the ability to sell, exchange, or dispose of them.

Jason Schwartz, tax partner and digital assets co-head at Fried Frank, termed the ruling disappointing while arguing that blockchain networks that pay staking rewards aren’t employers or similar counterparts who can accrue taxable income to the reward recipients.

IRS: "STAKING REWARDS ARE INCOME"

Today the IRS issued Revenue Ruling 2023-14 confirming its view that consensus-layer staking rewards are taxed at FMV when the staker has dominion and control over them (i.e., the ability to sell them). A brief🧵…

— CryptoTaxGuy.ETH 🦇🔊🛡️ (@CryptoTaxGuyETH) July 31, 2023

On the other hand, Ryan Selkis, founder of Messari, drew an analogy between the new IRS filing and paying stock dividends. He said, “The IRS says PoS rewards should be included in gross income, which means crypto has taken the concept of a “stock dividend” and made it taxable.”

https://twitter.com/twobitidiot/status/1686114239558123520

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