If you earned staking rewards this year, you owe income taxes.
Proof of Stake blockchains offer investors high returns for locking up their cryptocurrency. Of course, earning staking rewards also comes with an associated tax liability.
In this guide, we’ll break down everything you need to know about how staking rewards are taxed. We’ll answer a few commonly asked questions about staking taxes and show you how you can report your staking income on your tax return in minutes.
What is staking?
In Proof of Stake blockchains like Solana and Cardano, transactions are validated by stakers. In exchange for locking up a portion of their wealth and securing the blockchain, stakers receive a percentage of network fees.
VIDEO How is staking taxed?
The IRS has not issued explicit guidance on how staking is taxed. However, most tax experts agree that rewards will be taxed as income at the time of the receipt based on previous IRS guidance on
. mining taxes Do I have to pay taxes if I sell my staking rewards?
Just like other disposals of cryptocurrency, disposing of your staking rewards is considered a taxable event.
You will incur a
or capital gain loss based on how the price of your staking rewards has changed since you originally received them. In this case, the fair market value of your rewards at the time of the receipt can be used to determine . cost basis When should I recognize income from my staking rewards?
Staking income should be recognized at ‘time of receipt’. However, it can be unclear when ‘time of receipt’ takes place in certain situations.
For example, some investors who earn staking rewards through a third-party are unsure whether they should recognize income when the rewards are earned or when they withdraw their rewards into a personal wallet.
To better understand when staking rewards are considered taxable, it’s important to understand the concept of ‘dominion and control’.
Tax experts believe that staking rewards will be considered ‘received’ when investors have dominion and control over their coins. In other words, investors recognize income when they are able to freely trade and sell their coins.
It’s reasonable to assume that the IRS will claim that investors have ‘dominion and control’ as soon as they have the ability to withdraw their staking rewards - the rewards may be considered “constructively” received. As a result, it’s likely that you recognize income regardless if the coins are in your personal wallet or are in the hands of a third-party.
Are there any situations where staking rewards are non-taxable?
The conservative approach to tax reporting is to report staking rewards as income in any circumstance.
However, a more aggressive approach is to claim that staking rewards are non-taxable in cases where rewards
cannot be withdrawn.
For example, some platforms gave users the ability to stake their Ethereum, but restricted withdrawals until the full migration to
. In cases like these, some investors make the claim they do not have ‘dominion and control’ over their coins. Ethereum 2.0 How are staking pools taxed?
Earning staking rewards through a mining pool should be considered income when they are received, even if you do not withdraw your rewards. As stated earlier, it’s reasonable to assume that you have ‘dominion and control’ over your coins as long as you have the ability to withdraw them.
However, depositing and withdrawing your cryptocurrency from a staking pool is likely
not considered a taxable event , just like other wallet-to-wallet transfers. What if I can’t determine the fair market value of my staking rewards?
In some cases, it can be difficult to determine fair market value for staking rewards at the time of receipt.
like CoinLedger can help. The platform’s historical price engine can help you determine the fair market value of your staking rewards over time. Cryptocurrency tax software
Of course, the exact time when you received your staking rewards may not be visible on the blockchain. If you find yourself in this situation, you can reach out to your tax professional to determine a reasonable method to report your staking income.
Can I deduct staking equipment?
If you’ve bought your own validator equipment, you can write off the costs as an expense if you are operating as a trade or business. This deduction is not available for individual taxpayers.
How to report staking rewards on your tax return
Individual taxpayers can report their staking rewards as ‘Other Income’ on Form 1040 Schedule 1.
Businesses that earn staking rewards as part of their trade can report their income on Schedule C. Any expenses related to staking can be written off (provided they can be proven and they are a necessary part of business operations).
How CoinLedger can help
Trying to manually calculate your tax liability can be challenging. CoinLedger can simplify the process.
All you have to do is upload your staking rewards and other crypto transactions into the CoinLedger platform. Once you’re done, you’ll be able to generate a complete capital gains & income tax report with the click of a button. . Get started with a free preview report today