IRS Treats Crypto Staking Rewards for Tax Purposes

U.S. crypto investors must report the fair market value of their staking rewards as gross income, according to the IRS.

Crypto staking is a popular way for investors to earn passive income by pledging their cryptocurrencies to validate transactions on the blockchain. However, the Internal Revenue Service (IRS) has recently clarified that these rewards are not free money, but taxable income.

According to an official document, the IRS has ruled that crypto assets are treated as property for federal income tax purposes, and therefore, staking rewards must be included in the gross income of the taxpayers who receive them. The agency stated that the fair market value of the staking rewards is determined at the date and time the taxpayer gains control of the crypto assets, and that the same tax principles applied to property transactions are applicable to crypto transactions.

This means that taxpayers who receive staking rewards must report them as gross income alongside other sources of income, such as rent, royalties, and compensation for goods and services. The IRS also clarified that this rule applies to taxpayers who stake their crypto assets through crypto exchanges, as well as those who receive cryptocurrencies as payment for goods and services, including crypto miners.

“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,” the IRS explained.

The latest update from the IRS comes amid a crackdown on crypto staking activities by U.S. authorities, which has led some crypto exchanges to suspend or terminate their staking services. The U.S. Securities and Exchange Commission (SEC), in particular, has been targeting crypto staking activities since the beginning of this year, alleging that some of them are unregistered securities offerings.

In February, the SEC charged crypto exchange Kraken with offering its staking services as unregistered securities. The firm later agreed to pay $30 million in disgorgement and civil penalties and cease its staking service. In June, a U.S. judge ordered Kraken to provide sensitive user information to the IRS so that the agency could investigate if crypto investors were evading taxes. Meanwhile, the SEC has also sued Coinbase over its staking-as-a-service product, claiming that it is an unregistered security offering. The case is still pending in court.