In this article we are going to be speaking specifically for people who hold proof-of-stake (PoS) tokens as delegators, not those who are operating full-blown nodes as validators. We’ll discuss validators in a future article – as there are some interesting factors affecting them specifically – but the majority of crypto investors will only ever function as delegators.
Update: the IRS issued Revenue Ruling 2023-14 on July 31, 2023. We discuss this notice in this article on staking income. It is consistent with the guidance we published here on November 1, 2021, but when this article was written no IRS guidance had been issued yet.
Staking Rewards Taxation
So you’ve purchased a PoS token, have it staked, and have started receiving staking rewards. There are now two questions that you need to answer:
- Are these rewards taxable income?
- And if so, when is it taxable?
I’ll give you the short answers first and then we’ll get into how and why this might change. Under current guidance (or lack thereof):
- Staking rewards are taxable income
- The rewards are taxable income upon receipt
But again, this is likely to change in the future.
Why?
First, the IRS has not issued any staking specific guidance yet. And because of this people are adopting a pretty wide array of stances.
Some are claiming it is not income at all because it does not meet the person’s narrow definition of income. This is incorrect and is almost guaranteed to fail (along with massive penalties and potentially criminal sanctions from the IRS). It is income and will need to be claimed as such.
Certain Specifics to Be Determined
What is more up in the air is what type of income it is and when it should be claimed. Some taxpayers claim that staking rewards should not be taxable until they are sold or otherwise disposed of. There is an ongoing lawsuit in federal court claiming exactly that.
In a later article we’ll discuss these issues more in depth and how they could affect the FUTURE taxability of staking rewards. But this article is more to serve as a notice to the current tax treatment of staking income.
And under that CURRENT guidance (scant though it may be), staking rewards are taxable upon receipt. This is highlighted by both Notice 2014-21 (regarding mining rewards) and Revenue Ruling 2019-24 (regarding airdrops and hard forks). Notice 2014-21 said that mining rewards needed to be included as gross income “as of the date of receipt”. RR 2019-24 said that airdrops would need to be included as income when the taxpayer had “dominion and control” over the asset. There are some very limited instances where you do not have domain and control over staking rewards immediately, but in the vast majority of instances the IRS guidance is clear that the rewards needed to be claimed upon receipt.
Any accounting, business, or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties.
