IRS Labels Crypto Staking as Taxable: What You Need to Know Now!
In a bold move that has sent ripples through the crypto community, the Internal Revenue Service (IRS) has reaffirmed its position on cryptocurrency staking. The message is clear: if you’re raking in rewards from staking, prepare to pay taxes on them as soon as they hit your wallet. Forget any notions of waiting until you sell or exchange these digital assets; the IRS classifies staking rewards as taxable income from the moment they are generated.
IRS Confirms: Crypto Staking is Taxable Upon Receipt
As reported by Bloomberg in a recent article, the IRS is doubling down on its stance that digital asset staking rewards should be taxed as income the instant they become available to the taxpayer. This pivotal ruling promises to reshape how staking rewards are treated under US tax laws.
The IRS has made it abundantly clear: staking does not create new property. This directly challenges comparisons to farming, manufacturing, or artistic creation, where income is typically recognized only upon sale. Instead, the IRS insists that any rewards gained through staking are officially taxable income the moment they are received.
This firm position comes in the wake of a legal tussle involving Joshua and Jessica Jarrett from Tennessee. The couple staked their cryptocurrency on the Tezos (XTZ) network and argued that their staking rewards should only be taxed when they are sold or exchanged, claiming these rewards represented “new property,” much like a farmer’s harvest or an author’s manuscript.
However, the IRS countered their argument, stating that all staking rewards are taxable income as soon as they are received. In its official remarks, the agency declared:
Revenue Ruling 2023-14 requires taxpayers who receive staking rewards to report the rewards as income at their fair market value upon having the ability to sell, exchange, or otherwise dispose of them.
For those new to the scene, crypto staking involves locking up your cryptocurrency in a blockchain network to validate transactions and bolster network security, all while earning rewards in return. Often associated with proof-of-stake (PoS) systems, it’s an enticing way for investors to generate passive income on their holdings.
The IRS’s 2023 guidelines specify that block rewards, including those earned through staking, are recognized as income at the moment they are generated. Therefore, it’s crucial for taxpayers to meticulously track the fair market value of their tokens as they earn them, ensuring they’re prepared for potential tax liabilities.
The Backstory of the Tax Dispute
The Jarretts found themselves in a legal battle with the IRS back in 2021 when they filed a suit over the taxation of 8,876 XTZ tokens earned as staking rewards in 2019. Their argument hinged on the characterization of these rewards as “new property,” claiming they should only be taxed upon their sale or exchange.
Drawing analogies to farming and manufacturing, the couple contended that staking rewards should be treated similarly to a farmer’s harvest or a manufactured product—taxable only at the point of monetization.
In a twist of fate, the IRS offered the couple a $4,000 tax refund, which they declined, hoping instead to set a significant legal precedent for all proof-of-stake blockchain networks. However, the court dismissed the case, rendering it moot due to the refund offer.
In October 2024, the Jarretts launched a second lawsuit, seeking a refund of $12,179 for taxes paid in 2020 on roughly 13,000 XTZ tokens earned via staking. They also aimed for a permanent injunction against the IRS’s current tax treatment of staking rewards. This ongoing case holds the potential to influence the taxation landscape for crypto staking in the US.
While some might cry that the IRS is on the warpath against crypto investors, it’s worth noting that the regulator has taken several steps to ease the tax filing burden for taxpayers. However, the legal system is still hot on the trail of individuals suspected of tax evasion related to crypto dealings.
In a related development, an individual was recently sentenced to two years in prison for failing to report capital gains from crypto sales between 2017 and 2019. As of now, Bitcoin is trading at $97,471, reflecting a 4.2% increase in the past 24 hours.
Featured Image from Unsplash.com, Chart from TradingView.com
