- The US Internal Revenue Service (IRS) has ruled that income earned from staking digital assets should be treated as gross income, applicable for taxation in the year received.
- This ruling applies to cash-method taxpayers who validate transactions on proof-of-stake blockchains, both directly and through centralized crypto exchanges.
In a significant move, the US Internal Revenue Service (IRS) has delivered a new ruling that could reshape the cryptocurrency landscape. Crypto staking rewards, the agency says, must be reported as gross income in the year they are received, marking a critical juncture for investors and blockchain validators alike.
Disappointing ruling that fails to account for the inflation component, and the consequences of not staking. "Rewards" are a split you work to claim.
* If nobody stakes, the chain is dead and value of all coins goes to 0
* if you don't stake, your % ownership and % vote go down https://t.co/QuRH0tVYaS— Jesse Powell (@jespow) July 31, 2023
IRS Lays Down the Law
With Revenue Ruling 2023-14 issued on July 31, the IRS has given much-awaited clarification regarding the taxation status of staking rewards. These rewards are earned by validators for maintaining network integrity in proof-of-stake blockchains, a growing subset of the digital assets ecosystem.
Income, the IRS emphasizes, includes all realized gains, irrespective of their form, extending now explicitly to staking rewards. This applies to both direct staking participants and those utilizing centralized cryptocurrency exchanges. Essentially, the ruling dictates that the fair market value of the staking rewards at the time they are received should be incorporated into the annual income of the cash-method taxpayer.
In defining “dominion”, the IRS alludes to the point in time when the investor can exercise control over the crypto rewards. This implies the ability to sell, exchange, or dispose of the cryptocurrency rewards in any other manner.
Previously, the IRS had classified crypto-mining rewards as liable for both income and capital gains tax. However, there were no specific guidelines for staking rewards, leading to some ambiguity in the crypto community. Koinly, a renowned crypto tax firm, confirmed this gray area in taxation norms.
Danny Talwar, the Head of Tax at Koinly, illuminated the situation further, asserting that staking rewards will only be deemed as gross income when they become sellable. Thus, rewards that have accrued but are locked will not be taxable until the recipient can exercise full control over them.
The IRS’s stance has stirred responses from industry stalwarts like Ryan Selkis, founder of Messari, who drew parallels between the taxation of crypto staking and stock dividends. Meanwhile, Jason Schwartz, tax partner and digital assets co-head at Fried Frank, expressed disappointment, highlighting the necessity of a payer for taxable income to accrue in traditional tax laws.
This new bulletin comes amid increased scrutiny of crypto-staking service providers and exchanges by federal regulators, marking an important transition in the regulatory landscape of digital assets.
