If you earned staking rewards this year, you owe money to the IRS.
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?
Staking typically refers to participating in a Proof of Stake blockchain’s governance process.
This can be done by locking up a certain amount of cryptocurrency as collateral. In return, participants are rewarded with additional crypto for validating transactions. Staking is considered an eco-friendly alternative to cryptocurrency mining and allows cryptocurrency holders to earn passive income while supporting the blockchain ecosystem.
Staking also refers to committing your cryptocurrency to a DeFi protocol. Certain protocols will give you rewards for adding liquidity to the platform — typically in the form of transaction fees from other customers!
VIDEO How is staking taxed?
In 2023, the IRS released guidance that stated that staking rewards are considered income at the time of receipt.
If you dispose of your cryptocurrency rewards in the future, you’ll incur a capital gain or loss depending on how the price of your staking rewards changed since you originally received it.
How is DeFi staking taxed?
In most cases, DeFi staking income is subject to income tax.
However, some DeFi staking protocols leverage crypto-to-crypto swaps to allow users to stake/unstake crypto. It’s possible that these transactions may be subject to capital gains tax, like other crypto-to-crypto swaps.
For more information, check out our
guide to DeFi taxes. Are staking rewards taxed twice?
If you dispose of your staking rewards in the future, your gains will be subject to capital gains tax.
You may be required to pay income tax on your crypto upon receipt and capital gains tax upon disposal. However, it’s important to note that you won’t be taxed on the same profits twice.
When you dispose of cryptocurrency, you will incur a
or capital gain loss based on how the price of your staking rewards has changed since you originally received them. You won’t pay capital gains tax on the income you’ve already paid income tax on. When should I recognize income from my staking rewards?
As discussed earlier, staking rewards are recognized as income based on the fair market value of your crypto at the time of receipt. However, it can be unclear when ‘time of receipt’ takes place in certain situations.
For example, many investors who earn staking rewards are unsure whether they should recognize income when the rewards are earned or when they withdraw their rewards into a personal wallet.
What is ‘dominion and control’ and how does it relate to staking taxes?
Tax experts believe that staking rewards are considered ‘received’ when investors have dominion and control over their coins — or in other words, they can freely trade and sell their staking rewards.
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?
In cases where rewards
cannot be withdrawn, it’s reasonable to take the position that your staking rewards are non-taxable.
For example, some platforms gave users the ability to stake their Ethereum but restricted withdrawals until the
Ethereum Merge was completed. In cases like these, you would recognize income only when you have ‘dominion and control’ over your coins — in other words, when you have the ability to freely withdraw your crypto. What are staking pools?
A staking pool allows investors to pool together their staked crypto. By combining their resources, investors can have a larger collective stake and increase the chance that they’ll be selected as a validator and earn staking rewards.
Typically, pool operators will charge a fee or take a percentage of the staking rewards as compensation for their services. The operator manages the technical aspects of staking, such as maintaining the necessary infrastructure, ensuring uptime, and handling software updates.
How are staking pools taxed?
Earning staking rewards through a staking pool should be considered income at receipt, 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.
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?
Not sure what the fair market value of your staking rewards were at the time of receipt? You may have trouble reporting your taxes.
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. 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 Can I deduct staking equipment?
If you’ve bought your own validator equipment as part of a trade or business, you can write off the costs as an expense. 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 does the Tezos court case impact staking taxes?
In December 2021,
the IRS offered to refund Joshua and Jessica Jarrett for taxes paid on their staking income from the Tezos blockchain. Many investors wrongfully believed that this meant that staking rewards would not be taxed as income.
At the time, the IRS had not yet issued guidance on how staking is taxed. According to legal experts, the IRS offered a refund in this specific case to settle the matter without incurring legal costs and issuing definitive guidance.
As of 2023, the IRS is clear in its guidance that staking rewards are considered income at the time of receipt.
How is crypto staking taxed in Australia? , cryptocurrency staking rewards are taxed similarly to the United States. Staking rewards are taxed as income upon receipt and as capital gains upon disposal. In Australia How is crypto staking taxed in Canada?
The CRA hasn’t released official guidance on how cryptocurrency staking is
taxed in Canada . It’s likely that in most cases, staking rewards will be taxed as business income — because they were acquired with the intention of making a profit. How is crypto staking taxed in the UK?
as income upon receipt. When you dispose of your staking rewards, you’ll incur a capital gain or loss depending on how the value of your crypto changed since you originally received it. HRMC treats staking rewards 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