IRS Addresses Cryptocurrency Staking Rewards

On July 31, 2023, the Internal Revenue Service issued Revenue Ruling 2023-14, calling for proof-of-stake cryptocurrency rewards to be recognized as taxable income when cash method taxpayers gain dominion and control over the awarded cryptocurrency. According to the ruling, the fair value of staking rewards should be recognized as taxable income as of the date and time the taxpayer gains dominion and control. This treatment generally applies to both staking activity in native proof-of-stake blockchain protocols and staking services offered through cryptocurrency exchanges.

Federal Court Case

Concurrently, the issue of income recognition relating to staking rewards is also before the U.S. Federal Court of Appeals for the Sixth Circuit. In Joshua Jarrett, et al v. USA, the petitioners argue that cryptocurrency received through staking should not be taxed as income until it is sold or exchanged rather than, as the IRS has now ruled, when the taxpayer gains dominion and control.

While the revenue ruling is an official interpretation by the IRS of the Internal Revenue Code, related statutes, tax treaties and regulations, the ruling is not binding on courts. However, taxpayers who take positions inconsistent with the revenue ruling should properly disclose such positions to the IRS on their tax returns and be prepared for an IRS audit.

Our Interpretation

Conceptually, staking activity closely resembles an interest-bearing lending arrangement, where a lender provides capital to a borrower for a specified amount of time and receives interest income in return. Additionally, those who engage in staking protocols commonly participate with an expectation to generate a return on capital. Based on the conceptual similarities between these two types of activities, it is appropriate for proof-of-stake rewards to be taxed as ordinary income upon receipt. Our position is consistent with IRS Revenue Ruling 2023-14, and we recommend following the ruling’s treatment for staking rewards.

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