How to Report Staking Rewards on Your Tax Return in 2023

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? 

The term ‘staking’ is used to describe earning crypto rewards when you lock up your cryptocurrency with a Proof of Stake blockchain like Ethereum or a DeFi protocol like Compound.

In these cases, you earn rewards for putting your crypto to work — whether it’s through validating transactions on blockchains like Ethereum or providing liquidity for decentralized loan providers.

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. 

Are staking rewards taxed twice?

If you dispose of your staking rewards in the future, your gains will be subject to capital gains tax.

However, it’s important to note that you aren’t technically taxed on the same profits twice. 

When you dispose of cryptocurrency, you will incur a capital gain or loss based on how the price of your staking rewards has changed since you originally received them. To determine cost basis, you should look at the fair market value of your staking rewards at the time of receipt.

How is DeFi staking taxed?

In most cases, staking income is subject to income tax. However, some DeFi staking rewards may be taxed differently based on the specific mechanisms of the protocol. 

For more information, check out our guide to DeFi taxes. 

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. 

It'simportant to note that this does not set precedent for how staking rewards are taxed in the future. 

According to legal experts, the IRS offered a refund in this specific case to settle the matter without issuing definitive guidance and incurring significant legal costs. 

It’s recommended that you continue to report your staking rewards as income until the IRS issues more guidance on how staking is taxed.

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’. 

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? 

The conservative approach to tax reporting is to report staking rewards as income, even if you do not have ‘dominion and control’.

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 Ethereum Merge was completed. In cases like these, some investors make the claim that they did not have taxable income until they received ‘dominion and control’ over their coins.
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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. 

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. 

Cryptocurrency tax software like CoinLedger can help. The platform’s historical price engine can help you determine the fair market value of your staking rewards over time. 

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 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 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.