Emily Walker
The Internal Revenue Service (IRS) in the United States has reaffirmed its position regarding cryptocurrency staking, stating that rewards from staking must be declared as taxable income as soon as they are received. The IRS clarified that these rewards do not create new property, meaning they are taxable immediately when they are generated.
IRS Affirms Taxation of Crypto Staking Rewards Upon Receipt
A recent report from Bloomberg highlights the IRS’s position that digital asset staking rewards are taxable as income once they are generated and accessible to the staker. This clarification is expected to significantly impact how staking rewards are treated in terms of US tax regulations.
The IRS also emphasized that staking does not create new property, countering arguments that likened it to farming or manufacturing. Instead, they dismissed the idea that taxes on rewards should be deferred until the cryptocurrency is sold or exchanged.
This position emerged from a legal case involving Tennessee residents, Joshua and Jessica Jarrett, who staked cryptocurrency on the Tezos (XTZ) network. They argued that their rewards should only be taxable once sold, framing them as “new property” like harvested crops or written books.
However, the IRS maintained that all rewards from staking are considered taxable income at the time they are received. The agency stated:
Revenue Ruling 2023-14 mandates that taxpayers report staking rewards as income at fair market value once they can sell or exchange them.
To clarify, crypto staking involves locking cryptocurrency within a blockchain to validate transactions and secure the network, rewarding participants with additional tokens. This process commonly utilizes proof-of-stake (PoS) models, allowing users to earn passive income from their holdings.
The IRS’s guidance from 2023 specifies that block rewards earned through staking should be treated as income when generated, with tax liabilities based on their fair market value upon receipt. Therefore, tracking the value of tokens earned is essential for taxpayers.
Overview of the Tax Dispute
The legal issue between the Jarretts and the IRS began in 2021 when they filed a lawsuit concerning the taxation of 8,876 XTZ tokens earned through staking in 2019. They alleged these rewards were “new property” and should not incur taxes until they were sold or exchanged.
The couple argued that staking rewards should mirror a farmer’s crops or manufactured products, implying taxation should occur only upon sale.
The IRS responded by offering them a $4,000 tax refund, which they rejected in their bid to establish a legal precedent affecting proof-of-stake networks. Ultimately, the court dismissed their case as moot due to the refund offer.
In October 2024, the Jarretts initiated a second lawsuit seeking a tax refund of $12,179 for taxes they paid in 2020 regarding approximately 13,000 XTZ tokens earned from staking. They requested a permanent injunction against the IRS’s current tax treatment of staking rewards. This ongoing matter may have significant consequences for the taxation of crypto staking in the US.
While it may seem the IRS is targeting crypto investors, the agency has implemented various measures to simplify the process of filing crypto taxes. Nonetheless, U.S. legal entities are actively pursuing individuals suspected of tax evasion related to cryptocurrencies.
In a recent development, an individual received a two-year prison sentence for failing to report capital gains from crypto sales conducted between 2017 and 2019. At the time of this report, Bitcoin’s price had risen to $97,471, marking a 4.2% increase in the past 24 hours.