IRS states that crypto staking rewards are taxable upon receipt.

IRS states that crypto staking rewards are taxable upon receipt.

The Impact of the IRS Ruling on Crypto Staking Rewards

Excerpt from Rev. Rul. 2023-14. Source: IRS

The United States Internal Revenue Service (IRS) has recently issued a new ruling, Revenue Ruling 2023-14, which clarifies how income earned from staking digital assets should be treated for taxation purposes. According to this ruling, crypto investors in the United States are required to report crypto staking rewards as gross income in the year it was received.

Understanding the IRS Ruling

Under the ruling, gross income includes income realized in any form, including staking rewards. This applies to cash-method taxpayers who receive crypto as remuneration for validating transactions on proof-of-stake blockchains. The ruling also applies to both direct staking of cryptocurrency and staking through centralized crypto exchanges.

The IRS ruling states that the fair market value of the crypto rewards should be included in annual income and determined at the time the assets are received. The concept of “dominion” is introduced, which refers to the time when the investor gains control and has the ability to sell, exchange, or otherwise dispose of the cryptocurrency rewards.

Tax Treatment for Staking Rewards

Before this ruling, the IRS had subjected crypto-mining rewards to both income and capital gains tax, but had no provisions for staking rewards. The Revenue Ruling now adds clarity to the taxation of staking rewards. Danny Talwar, Head of tax at Koinly, a crypto tax firm, explains that staking rewards are only taxed as gross income when they are able to be sold. This means rewards that are accrued but locked won’t be taxable until the recipient can exercise “dominion and control” over them.

Comparing Staking Rewards to Stock Dividends

Some experts have likened the IRS treatment of crypto staking to stock dividends. Ryan Selkis, the founder of Messari, highlights that proof-of-stake (PoS) blockchains embed state-level taxes into their protocols. He compares the taxation of staking rewards to the concept of a “stock dividend” in the traditional financial markets. Just as you receive a taxed dividend for slicing a pizza into more slices, staking rewards are taxable based on the number of rewards received.

Criticisms and Disappointment

While the IRS ruling was expected, it has still received criticism. Jason Schwartz, tax partner and digital assets co-head at Fried Frank, expresses disappointment with the ruling. He explains that tax law typically requires the existence of a payer for taxable income to accrue to someone. However, with staking rewards, there is no traditional clear-cut payer. This has raised concerns among experts regarding the application of traditional tax principles to crypto assets.

Regulatory Landscape

The IRS ruling comes at a time when U.S. federal regulators, such as the Securities and Exchange Commission (SEC), are targeting crypto-staking service providers and exchanges. The SEC alleges that these entities are offering illegal securities sales. This highlights the increasing scrutiny and regulatory focus on the cryptocurrency industry in the United States.

Conclusion

The recent IRS ruling regarding the taxation of crypto staking rewards has brought clarity to how these rewards should be treated for tax purposes. Crypto investors in the United States are now required to report staking rewards as gross income in the year it was received. The ruling has generated discussions around the analogy to stock dividends and the application of traditional tax principles to the evolving crypto landscape. As the regulatory environment continues to evolve, it is important for crypto investors to stay informed and comply with the tax obligations associated with their activities in the blockchain industry.

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