The Internal Revenue Service (IRS) recently released Revenue Ruling 2023-14, which states that United States crypto investors must report crypto staking rewards as gross income in the year it was received. This ruling applies to cash-method taxpayers who receive any crypto for validating transactions on proof-of-stake blockchains, both when staking cryptocurrency directly and through a centralized crypto exchange. The fair market value of the rewards must be included in annual income and determined when the assets are received. The IRS defines “dominion” as the time when the investor controls and has the ability to sell, exchange, or otherwise dispose of the cryptocurrency rewards.
Prior to this ruling, the IRS subjected crypto-mining rewards to both income and capital gains tax, but had no provisions for staking rewards. Messari founder Ryan Selkis compared crypto staking to stock dividends, saying that “What PoS blockchains do at scale is embed state-level taxes into their protocols.” Jason Schwartz, tax partner and digital assets co-head at Fried Frank, noted that “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.”
The IRS tax bulletin comes at a time when U.S. federal regulators are targeting crypto-staking service providers and exchanges for allegedly offering illegal securities sales. It is important for crypto investors to be mindful of the tax implications related to staking rewards.