IRS Issues Guidance on Staking Rewards

On July 31, 2023, the IRS released Rev. Rul. 2023-14, explaining that staking rewards are taxed at the time you gain dominion and control (D&C) over the tokens. This long-awaited ruling clarifies a highly debated tax topic - when should staking income be taxed? The new ruling applies to both direct staking and staking through a cryptocurrency exchange.

Tax implications of staking rewards

The ruling confirms that the staking rewards are income when a taxpayer has D&C over the staking rewards. Generally, a taxpayer obtains D&C through constructive receipt, which is when “it is credited to his account, set apart for him, or otherwise made available so that he may draw upon it at any time” (Reg. § 1.451-2(a)) and there are no substantial limitations or restrictions. Essentially, this is when you can sell or transfer the asset without any restrictions. If there are restrictions, you do not have total D&C over the rewards.

For example, Chris stakes 100 Tez (XTZ) on Coinbase and receives a reward of 0.5 XTZ (worth $10 at the time of receipt). Chris has instant access to these rewards with no restrictions. Here, he has to report $10 as ordinary income. The reported income will be the cost basis when he sells the reward in the future. If Chris sells 0.5 XTZ for $30 next year, he will have a capital gain of $20 ($30 - $10).

This ruling is significant because this is the first time the IRS has opined and issued guidance on staking rewards. The industry has been seeking clarity on this matter since a Tennessee couple (Joshua and Jessica Jarrett) amended their original tax return to remove staking rewards that they originally reported as income at the time of receipt. They argued that staking rewards should not be taxable upon receipt because they are newly created property. Newly created property is taxed only at the time of sale under the current tax code. For example, a painter doesn’t pay tax when they paint a new painting; tax is due when he sells the artwork for money. Unfortunately, this court case was dismissed and failed to generate a formal ruling around staking taxation because the court did not explain the rationale for issuing the refund.

How CoinTracker treats staking rewards

CoinTracker has always followed the conservative tax treatment outlined in Rev. Rul. 2013-14, treating staking rewards as income when received. You must report the rewards on Schedule 1, line z, “Other income.”

When you sell your rewards, you will report the capital gains on Form 8949 and Schedule D.

If you have any questions or comments about crypto taxes, let us know on Twitter @CoinTracker.

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Disclaimer: This post is informational only and is not intended as tax advice. For tax advice, please consult a tax professional.