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August 08, 2023 at 02:30 PM
What You Need to Know
- The new ruling clarifies that receiving coins via staking is similar to receiving other taxable items — taxable when received.
- While welcome, the ruling doesn’t address the treatment of expenses associated with staking activities.
- Some clients who have recognized income from staking rewards may have paid taxes prematurely.
Taxwise, buying and selling bitcoin is the same as buying and selling stocks: Both assets are generally treated as property, and both are subject to capital gains tax rules.
But what about staking?
That’s the process where clients pledge or lock up their digital assets in exchange for receiving additional coins or tokens. Staking is part of the essential validation process for proof-of-stake blockchains, and some argue that receiving coins via staking is like earning a dividend from a stock — taxable when received. But the IRS hasn’t explicitly said so, leaving advisors in a gray zone.
Until now.
On July 31, the IRS issued Revenue Ruling 2023-14, stating that cash-method taxpayers receiving cryptocurrency as staking rewards for validation activity on proof-of-stake blockchain should recognize the fair market value of the rewards in their gross income (thus, generally subject to ordinary income tax rates) in the tax year they gain control of the reward tokens.
The IRS also says this applies when taxpayers conduct staking activity through a crypto exchange. An important component of the ruling is the concept of “dominion and control.” This occurs when investors gain control over the staking rewards and can exercise their rights to sell, exchange, or dispose of the tokens.
The ruling is not a surprise, as there are similarities to several prior IRS notices and rulings pertaining to crypto.
In Notice 2014-21, the IRS stated that for a taxpayer who successfully mines cryptocurrency, the fair market value of the mined coins or tokens as of the date of receipt is includable in gross income.
In Revenue Ruling 2019-24, the IRS ruled that a taxpayer has gross income as a result of an airdrop following a hard fork if the taxpayer receives units of new cryptocurrency. (However, the IRS clarified that a taxpayer does not have a taxable event until the taxpayer is able to exercise “dominion and control” over the crypto). This latest ruling follows this same reasoning.
