Rewards from Staking Crypto Are Taxable upon Receipt; U.S. IRS Says

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The ruling by the IRS yesterday imposes tax payments on staking rewards from crypto. It mandates that all crypto-staking rewards should be counted as income.

The internal revenue service ruling explained how the income investors earned from staking digital assets should count as taxable income, noting that income realized in any way, whether in property, staking rewards, services, and money, are all referred to as gross income. 

How Staking Rewards Are Taxed

According to the IRS, the ruling applies to taxpayers who use the cash-method tax system and receive any cryptocurrency as payment for the validation of transactions on Proof-of-Stake blockchains. This ruling applies to both direct and centralized cryptocurrency staking.

Per the ruling, the equitable market value of crypto rewards should be considered in the annual income calculation and determined at the time of receipt of the assets.

Taxing Crypto Staking Rewards

The Internal Revenue Service (IRS) has previously classified crypto-mining rewards as income and capital gains but has not made any provision for staking rewards.

According to the IRS legal analysis, the fair market value should be considered in calculating the taxpayer’s gross income for the taxable year during which the taxpayer obtains dominion and control of the token’s validation rewards.

For context, the fair market value of the staking rewards is established based on the date and time at which the taxpayer obtains dominion and control over them. The term “dominion” is the point at which the investor controls the rewards of crypto assets and can sell, exchange, or otherwise dispose of them.

 According to the agency’s legal analysis, the “fair market value” of the tokens should be considered from the moment the taxpayer obtains control of them.

While the ruling is unsurprising, “it’s still a disappointment,” said Jason Schwartz, Tax Partner and Digital Assets Co-Head at Fried Frank. “Tax law has always said that for taxable income to be attributed to someone, there must be a payer, whether it’s an employer or another counterparty, even a treasure trove discovery is a deferred payment,” Schwartz said.

This IRS ruling also applies to investors who stake tokens through a cryptocurrency exchange as long as the taxpayer obtains “an additional number of units of cryptocurrency” as a reward for the validation, according to the document released by the IRS on its official website.

IRS guidance on staking services comes when regulators across the country, particularly the SEC, have been cracking down on staking services offered by crypto exchanges as unlawful securities offerings.

Kraken settled claims from the SEC in February, while the agency recently accused Binance of using its staking service in violation of securities law.