Staking rewards are still taxable upon receipt. In Paschall v. Commissioner, T.C. Memo. 2026-46, a couple petitioned the Tax Court arguing that their ADA rewards should not be included as taxable income. The Tax Court disagreed with them and landed in the same place as Rev. Rul. 2023-14, which is that staking rewards are taxable once the taxpayer has gained dominion and control over the tokens, but it was careful to say that it reached that conclusion on its own and did not rely on the ruling.
We’ve written pretty extensively on the taxation of staking income over the years. We first wrote our stance that the rewards were taxable upon receipt, but noted that the IRS had not issued any staking specific guidance. We then covered the Jarrett v. U.S. lawsuit where a couple sued claiming the tokens should not be taxable income, but how that case was ultimately ruled moot after the IRS issued the couple a refund. And then wrote about the guidance the IRS finally issued in Revenue Ruling 2023-14 where they said that the tokens were to be included as taxable income once a taxpayer gained full dominion and control over the asset.
Jarrett was a court challenge too, but it was dismissed as moot before the judge ever reached the question of whether staking rewards are taxable income. We’ve now seen the first decision on the merits, and we think the full opinion is worth reading.
In Paschall v. Commissioner, T.C. Memo. 2026-46, a couple received $33,354 of Cardano rewards via their eToro account. eToro issued them a 1099-MISC, which the couple did not receive because it was sent to an old address. The IRS assessed taxes and penalties on the deficiency and the couple petitioned the Tax Court.
In its decision, the Tax Court focused heavily on dominion and control. It described Rev. Rul. 2023-14, but went out of its way in a footnote to say that it was not relying on the ruling:
“As discussed below, we do not rely upon Revenue Ruling 2023-14 for our conclusion; we cite it only for completeness. We note that “[w]e are not bound by revenue rulings; under Skidmore, the weight we afford them depends upon their persuasiveness and the consistency of the Commissioner’s position over time.”
Instead, the court started from Section 61 and the case law behind it:
“The starting point in all cases dealing with the question of the scope of what is included in ‘gross income’ begins with the basic premise that the purpose of Congress was ‘to use the full measure of its taxing power.’” James v. United States, 366 U.S. 213, 218–19 (1961) (quoting Helvering v. Clifford, 309 U.S. 331, 334 (1940)). When Congress wishes to exempt income from inclusion, it does so explicitly. See id. at 219.”
The Paschalls made four arguments for why the tokens were not taxable. The fourth was that under Loper Bright, Rev. Rul. 2023-14 could not be applied to them at all, and the court set that one aside because, as the footnote above says, its conclusion never rested on the ruling. The Tax Court rejected the other three on the merits:
First, they claimed that they did not have dominion and control over the tokens because eToro decided to delist Cardano from its platform and, from the November 23, 2021 notice through the end of the year, restricted their ability to transfer the tokens to another wallet. But importantly it did not restrict his ability to sell the tokens and convert them to cash. The court noted:
“As the Supreme Court noted in Helvering v. Horst, 311 U.S. 112, 118 (1940), the “power to dispose of income is the equivalent of ownership of it.”“
“Even though Mr. Paschall chose not to sell the staking rewards during 2021, he had the ability to do so. The restriction on transfers to wallets hosted by services other than eToro does not negate Mr. Paschall’s accession to wealth upon his receipt of the staking rewards.”
The couple’s second line of defense was that the rewards should not be taxable until they were sold, citing Eisner v. Macomber – a case where pro rata stock dividends were not treated as income under the Sixteenth Amendment.
But the comparison made little sense, which the Tax Court noted in its opinion:
“Crucial to the Court’s conclusion in Macomber was that “stock dividend[s] really take nothing from the property of the corporation and add nothing to that of the shareholder.” Id. at 212. That is, the stock dividend at issue in Macomber created no increase or shift in the value owned; it merely increased the total number of outstanding shares. “[I]t [did] not alter the preexisting proportionate interest of any stockholder or increase the intrinsic value of his holding . . . .” Id. at 211.
Unlike the stock dividend in Macomber, the staking rewards Mr. Paschall received increased his proportion of all outstanding Cardano tokens. The fact that eToro automatically staked Cardano tokens is immaterial; this is a feature of the eToro platform, not the underlying asset. And critically Mr. Paschall could opt out of the staking service.”
Next, the couple took the exact same stance that was in the Jarrett case – specifically citing it. They argued that because cryptocurrency is an asset and that staking is creating a new asset that “tokens created through staking are like a baker’s cake or a writer’s book—products of labor and capital that yield income only upon sale.”
Again, the Tax Court disagreed. Jarrett was in federal district court, so the Tax Court was never going to rule on it, but this gives us a fairly clear indication of what it thinks of the theory:
“Their analogy is misplaced. Stakers do not create anything by themselves. Instead, the staked tokens validate transactions on the blockchain. In exchange for validation, the cryptocurrency’s protocol grants stakers additional tokens. The fact that these tokens may be newly created is immaterial because the stakers are not the ones who created them. Further, petitioners were not owners or operators of a staking pool; unlike the baker or writer, they lacked the power to decide whether (and when) the property was created.”
That last point feels almost like a throwaway given the court’s view on the theory as a whole, but it is very possibly one of the most important ones for future court cases: the Paschalls were not even staking their own tokens. They didn’t set up a node or a validator and did not even stake directly. They were using eToro as a staking-as-a-service provider. “Customers received 75% to 90% of the staking rewards, while eToro retained 10% to 25% as a fee, with the exact percentage dependent on the customer’s membership level.”
In that setup it is extraordinarily difficult to claim you are directly creating a new asset.
If this is challenged in future court cases by those more directly involved in the process (someone running their own validator rather than letting eToro do it for them), they will have a much stronger claim on the self-created property point – but that will only matter if a court accepts the general theory, which this one did not seem inclined to do.
It is also worth remembering what this decision is and isn’t. It is a memorandum opinion, which is not binding precedent, so the next court to look at staking rewards is not required to follow it. What could still change the picture? An appeal of Paschall, whatever becomes of the Jarretts’ second refund suit for their 2020 tax year, and bills in both the House and the Senate (the Digital Asset Tax Certainty Act, H.R. 10357, and the ADAPT Act) that would defer tax on staking rewards until the tokens are sold.
For now – and for better or for worse – Rev. Rul. 2023-14 and the IRS’s position continue to hold, and for the first time they have a court decision behind them.
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.
