IRS Says Crypto Staking Rewards are Taxable Once Received

In a decision that promises to have far-reaching implications on the world of cryptocurrency, the U.S. Internal Revenue Service (IRS) has issued Revenue Ruling 2023-14. This pronouncement delineates that all staking rewards are to be deemed as gross income, and are therefore subject to taxation. As a consequence, United States crypto investors are required to report these rewards as income for the year in which they are received.

The IRS’ edict includes income realized in all forms — money, property, services, and now notably, staking rewards. This mandate applies to cash-method taxpayers who accrue crypto as remuneration for validating transactions on proof-of-stake blockchains. This is applicable regardless of whether the staking process occurs directly or via a centralized crypto exchange.


Dissecting the Concept of ‘Dominion’

The central principle the IRS uses to classify income in this context is ‘dominion’. As per the ruling, “The fair market value is determined as of the date and time the taxpayer gains dominion and control over the validation rewards.” This implies that ‘dominion’ is reached at the moment the investor possesses the ability to sell, exchange, or otherwise utilize the cryptocurrency rewards.


Comparing Staking to Mining

Previous IRS guidelines have subjected crypto-mining rewards to both income and capital gains tax, however, staking rewards had been conspicuously absent in previous provisions. Koinly, a renowned crypto tax firm, stated that this ruling is an extension of existing tax policies into a previously unregulated arena.

In crypto-mining, powerful computers compete to solve complex mathematical problems, and the first to succeed is rewarded with cryptocurrency. On the contrary, in crypto-staking, holders of the cryptocurrency validate transactions and create new blocks, receiving staking rewards as a result. The introduction of tax implications for staking rewards thus ensures parity with crypto mining.


Crypto Staking: Analogous to Stock Dividends?

Messari founder Ryan Selkis likened the IRS’s treatment of crypto staking to the taxation of stock dividends, adding another layer of legitimacy to the field of cryptocurrency. However, this new classification was not universally celebrated.

Jason Schwartz, a tax partner and digital assets co-head at Fried Frank, expressed his dissatisfaction with the IRS ruling: “Tax law has always required the existence of a payer, such as an employer or other counterparty, for taxable income to accrue to someone. Even treasure trove discoveries are deferred payments.” Schwartz’s stance suggests that the unique nature of cryptocurrency might necessitate a rethinking of traditional tax laws.


A Global Trend

The IRS tax bulletin’s issuance occurs concurrently with increasing efforts by U.S. federal regulators, such as the Securities and Exchange Commission, to scrutinize crypto-staking service providers and exchanges, under allegations of illegal securities sales. This ruling is emblematic of a larger global trend wherein governments seek to adapt to and regulate the rapidly evolving cryptocurrency landscape.


Conclusion: A New Era for Crypto

In summary, the IRS’s categorization of staking rewards as taxable income marks a significant moment in the maturation of the cryptocurrency space. It encapsulates the growing recognition and legitimacy of digital assets in the traditional financial framework. As the global crypto community digests and reacts to this news, one thing is clear: this ruling heralds the dawn of a new era in cryptocurrency taxation.