Crypto staking is a process that involves actively participating in a blockchain network’s operations by locking up a certain amount of digital assets (usually coins or tokens) as collateral. Staking helps secure the network, as participants actively support the consensus mechanism, making it more robust against potential attacks. In return, stakers are incentivized with rewards for their contribution, making it an attractive avenue for passive income generation.
Until this new crypto IRS guidance, uncertainty on the tax treatment of crypto staking rewards was pervasive. In Jarrett v. United States, the taxpayer Jarrett argued that crypto staking rewards were newly created property. They argued they should not be taxed until the rewards were ultimately sold. In issuing Rev. Rule 2023-14, the IRS clarifies that this is not the case. Rev. Rule 2023-14 provides for the fair market value of the reward, determined as of the date and time the taxpayer gains dominion and control over the reward, to be included in the taxpayer’s gross income. In short, staking rewards are taxable similarly to the taxation of ordinary dividends earned on shares of stock.
We’re glad to have clarity on this critical component of the crypto ecosystem, however many crypto tax situations do not yet have IRS guidance. Please reach out to us if you need help navigating your complex crypto tax situation.