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  • L Higgins and M Bacina

IRS says staking rewards are taxable income when tokens are received

This week the United States' Internal Revenue Service (IRS) issued Revenue Ruling 2023-14, which confirms that US crypto investors must report rewards earned from staking digital assets as gross income, in the same year it was received.

Staking usually involves crypto holders putting their digital assets 'to work' and earning a return (usually in the form of additional rewards denominated in the same cryptocurrency that the crypto holder placing at stake). Crypto holders 'lock up' their tokens in various ways, in order to participate in the running of the particular blockchain and assist in maintaining its security. Some staking will involve the provision of validator notes and crypto not leaving the customers wallet (known as 'non-custodial' staking) and some will require a transfer in to a smart-contract or other wallet ('custodial staking').

The ruling states that gross income which must be declared includes income realised in any form, whether that be money, property, or in this case, staking rewards. The value of the tokens received as staking rewards must be calculated as of the moment the taxpayer gains control (or could gain control) of the tokens (i.e. has the ability to sell the tokens):

The fair market value of the validation rewards receiving is included in the taxpayer's gross income in the taxable year in which the taxpayer gains dominion and control over the validation rewards

This principle holds true for investors staking tokens through a cryptocurrency exchange or on their own, and will create pricing headaches for do it yourself stakers unless they use specialised taxation software to calculate the price and tax payable.

The IRS' approach may be disappointing to some given the longstanding historic principles in which tax should apply in similar scenarios. When taxpayers extract precious materials, harvest crops, produce goods, or otherwise exercise 'dominion and control' over property which had no previous owner, tax law in the US (also Australia) has historically operated to impose tax at the point of sale of that property.

The IRS' approach in the ruling instead operates to impose tax at the point of receipt of tokens. This ruling could be said to be contrary to these longstanding principles of taxation law, and being akin to a miner being taxed on the market price of goal the moment they unearth a shiny nugget of gold ore, but on the other hand it may be a recognition of staking sharing some similarities with investment contracts or deposit accounts, reflecting some staking advertising.

IRS rulings are not explicitly binding on taxpayers, however they are generally viewed as highly persuasive. Although the ruling may be a disappointing outcome for some wishing for more technology-neutral (and tax deferring) approach to digital asset taxation, there remains hope for US investors as the Lummis-Gillibrand digital assets bill would confirm that staking or mining rewards are not taxable until the point of sale. A section-by-section summary of the bill can be viewed here.

The Australian Board of Taxation has a crypto taxation consultation underway, with a report due in the next 6 weeks.


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