It's Official: IRS Will Tax Crypto Staking Rewards

Under the IRS’s new Revenue Ruling 2023-14, an entity that stakes cryptocurrency native to a proof-of-stake blockchain must pay tax on any crypto they receive as rewards upon validation. The IRS defines cryptocurrencies as “convertible virtual currencies,” adding that people who hold crypto in a proof-of-stake blockchain can stake it in the validation process if they have the required number of units of the asset in question.

What does this mean? An example

For example, a cash-method taxpayer owns a certain number of crypto units, and a proof-of-stake consensus mechanism validates the transactions that involve them. The entity stakes some of these units and validates a new block on the respective network, obtaining three units of the crypto as a validation reward.

The entity is unable to dispose of the three units for a certain time period. The IRS’s new ruling stipulates that the value of the staking reward received is part of the entity’s gross income as of the date that they are able to sell or otherwise dispose of the reward.

Courts don’t have to agree with the ruling

There is another view: that the legal system should treat staking rewards as self-created property, not unlike a commodity. The crypto earned could be treated like a newly manufactured pair of sneakers, for example, which are only taxable when the producer sells them.

There are and have been lawsuits over whether the IRS should be able to tax staking rewards as of the date that the taxpayer is able to sell or otherwise dispose of them.

Decision from Appeals Court expected

It’s possible another decision on this issue will follow in the immediate future, this time from the US Court of Appeals for the Sixth Circuit, a federal court with appellate jurisdiction over the district courts in the Eastern and Western Districts of Kentucky, the Eastern and Western Districts of Michigan, the Northern and Southern Districts of Ohio, and the Eastern and Middle Districts of Tennessee.