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The United States' top tax authority, the Internal Revenue Service (IRS), has issued a new ruling clarifying the treatment of income earned via staking crypto.
According to the Revenue Ruling 2023-14, cryptocurrency staking rewards—along with all other forms of income, including money, property, and services—are now considered gross income and must be reported as such in the year they were received.
This means that any income earned through staking digital assets on proof-of-stake (PoS) blockchains must be included in taxpayers' annual income.
Staking refers to the process of participating in the PoS consensus mechanism. It allows cryptocurrency holders to lock up their funds as collateral to support the network's operations and secure the blockchain, receiving rewards in the form of newly minted tokens.
“If a cash-method taxpayer stakes cryptocurrency native to a proof-of-stake blockchain and receives additional units of cryptocurrency as rewards when validation occurs, the fair market value of the validation rewards received is included in the taxpayer’s gross income in the taxable year in which the taxpayer gains dominion and control over the validation rewards,” reads the bulletin.
A dominion typically refers to the level of control or ownership an individual or entity has over certain assets or income. It's often used in the context of determining tax liability, specifically in relation to whether an individual or entity has enough control over certain assets or income to be considered the "owner" for tax purposes.
According to the IRS, to calculate the taxable income, the fair market value of the crypto rewards should be determined at the time the assets are received. This value is then added to the taxpayer's annual income for that tax year.
The agency further clarified that the ruling applies to both cash-method taxpayers staking cryptocurrency directly and those staking through centralized crypto exchanges.
“The same is true if a taxpayer stakes cryptocurrency native to a proof-of-stake blockchain through a cryptocurrency exchange and the taxpayer receives additional units of cryptocurrency as rewards as a result of the validation,” according to the IRS.
IRS ruling 'disappointing'
Commenting on the ruling, Jason Schwartz, tax partner and digital assets co-head at law firm Fried Frank, said that it confirms the assumption most tax advisors had about consensus-layer staking rewards being taxed similarly tomining rewards.
“While the ruling is therefore unsurprising, it’s still disappointing,” wrote Schwartz. “Tax law has always required the existence of a payer, such as an employer or other counterparty, for taxable income to accrue to someone. Even treasure trove discoveries are deferred payments.”
3/ While the ruling is therefore unsurprising, it’s still disappointing.
Tax law has always required the existence of a payer, such as an employer or other counterparty, for taxable income to accrue to someone. Even treasure trove discoveries are deferred payments.
— CryptoTaxGuy.ETH ⌐◨-◨ 🦇🔊🛡️ (@CryptoTaxGuyETH) July 31, 2023
By way of illustration, Schwartz said that “when taxpayers extract minerals, harvest crops, breed livestock, produce art or goods, or otherwise exercise dominion and control over property for which no previous owner exists, they aren't taxed until they sell the property.”
According to him, the newly minted tokens users receive as staking reward can be compared to newly extracted minerals, which means “they shouldn’t be taxed until sold.”
“Blockchains are not tax 'persons,' so they're not payers,” added Schwartz.
The IRS tax bulletin on reporting crypto staking rewards comes at a time of increased regulatory scrutiny of the cryptocurrency industry by U.S. federal regulators, particularly the Securities and Exchange Commission (SEC), which has been actively targeting crypto-staking service providers and exchanges, raising concerns about potential illegal securities sales.
In June, the SEC filed a lawsuit against Coinbase, accusing America’s largest crypto exchange, among a sleuth of other allegations, of offering and selling unregistered securities via its staking service.
Prior to that, in February, the Commission hit cryptocurrency exchange Kraken with a $30 million fine for violating securities laws after the firm failed to register the offer and sale of their crypto asset staking-as-a-service program.