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Wondering if staking ETH2 is taxable and how to report it? You’re not alone. With the Ethereum 2.0 Shanghai/Capella upgrade just around the corner, validators will soon be able to access their staking rewards for the first time. But with the legal gray area surrounding ETH2 staking taxes, it’s more important than ever to understand how—and when—to report them.
Whether you’re staking Ethereum on Coinbase or a decentralized service, this post is a must-read to understand your tax obligations!
Are staking rewards taxable?
Yes, staking rewards are taxed as ordinary income at the time of receipt. In the case of locked Ethereum, the time of receipt is a gray area, but that doesn’t change the fact that staking rewards are taxable income.
Check out our easy Crypto Tax Guide for an overview of how staking rewards are taxed when they’re received and when you sell them.
Taxes when staking ETH on Coinbase
If you’re staking ETH through Coinbase, then your staking rewards are already reported on Form 1099-MISC, which Coinbase issues each year. That means even when your rewards were locked up, they were still reported to the IRS as taxable income at the time they were earned.
This isn’t necessarily a bad thing; keep reading to discover the potential benefits of this reporting method.
However, there’s another nuance to staking ETH on Coinbase which is less favorable to taxpayers. When you give Coinbase ETH to stake, it “converts” the ETH to ETH2 and labels this a taxable event. We anticipate that after the Shanghai upgrade, when Coinbase actually distributes staking rewards to users, it will again “convert” the ETH2 to ETH and label the event taxable.
With the help of an experienced cryptocurrency tax attorney, you may be able to dispute this treatment and lower your tax bill.
Taxes when staking ETH on a decentralized platform
If you’re staking ETH on a decentralized platform, your staking rewards are still taxable income, but you have some flexibility to decide when the income was received. Some people have chosen to report ETH staking income at the time it was awarded, even though the coins were locked, while others have chosen to wait until rewards are unlocked.
Since everyone’s personal situation is different, we highly recommend speaking to a qualified crypto tax professional before making a decision.
Why does the timing of staking rewards matter for your taxes?
When you have crypto taxed as ordinary income, the amount of income you report is the fair market value of the cryptocurrency at the time of receipt. For example, if ETH was trading at $5,000 at the time you earned 2 ETH in staking rewards, then you have $10,000 of taxable income report.
With ETH staking rewards being awarded to validators every 6.5 minutes, and the fair market value of ETH constantly fluctuating, the timing of the rewards is key.
Typically, cryptocurrency is considered “received” as soon as you have dominion and control over the token. But since Ethereum 2.0 has been locked prior to the Shanghai upgrade, you could potentially argue that you had no dominion and control over your staking rewards until they were unlocked.
In that case, you could wait to report the income from staking rewards until it’s actually released to your wallet.
Why would you want to report staking income while it was locked?
- The value of ETH may increase after the Shanghai upgrade, which would raise the amount of taxable income you have to claim.
- Once you sell, convert, or otherwise dispose of your ETH, you create a capital gain or capital loss. Tax rates are more favorable if you’ve held the asset for more than 1 year; this is called a long-term gain. Reporting the income earlier may make the difference between having long-term or short-term gains when you sell.
It may be beneficial for you to amend previous tax returns to retroactively claim staking income.
Will my ETH or ETH2 be taxed when I sell?
Yes, selling, swapping, converting, or trading your ETH creates a taxable event. That doesn’t mean you’ll be double-taxed, though. The amount that you initially reported as income will be your cost basis, and you only have to pay capital gains tax on any profit. Learn more in our Crypto Tax Guide.
You may be wondering, “Shouldn’t my ETH only be taxed when I sell? What about that couple in Tennessee who received an IRS refund?” Unfortunately, that IRS staking case had no impact on the tax code.
Pro tip: Set up a wallet just for ETH staking rewards
Before your staking rewards from ETH are unlocked, we recommend setting up a wallet that will only be used for these rewards. This can help you determine the cost basis of specific batches of ETH, which would allow you to use the Specific ID accounting method. This can sometimes lead to a lower tax bill.
Is converting ETH to ETH2 a taxable event?
The details of the final switch from ETH to ETH2 are still unknown. Based on our current knowledge, it seems unlikely that the final switch from Ethereum to Ethereum 2.0 will create a taxable event for ETH holders, but that could change based on the details of how these blockchains converge.
As we mentioned above, the way that Coinbase and other centralized exchanges report a “conversion” of ETH to ETH2 can be disputed.
Save time and money with professional crypto tax help!
Whether you’re staking, mining, or dabbling in DeFi, cryptocurrency taxes are complicated. The experienced professionals at Gordon Law Group are here to help! We can prepare your crypto and non-crypto taxes, unlock the best strategies to lower your bill, and make the entire process stress-free.
As a seasoned expert in cryptocurrency taxation, I bring a wealth of firsthand knowledge and depth of expertise to guide you through the intricate world of staking Ethereum 2.0 (ETH2) and its tax implications. My extensive experience stems from navigating the ever-evolving landscape of crypto regulations and staying abreast of the latest updates.
The article you've shared delves into the taxation of staking rewards from Ethereum 2.0, particularly in the context of the impending Shanghai/Capella upgrade. Let's break down the key concepts and provide comprehensive insights:
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Taxation of Staking Rewards:
- Staking rewards are considered taxable as ordinary income at the time of receipt.
- The legal gray area regarding the time of receipt for locked Ethereum does not negate the taxable nature of staking rewards.
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Reporting Staking Rewards on Coinbase:
- Staking ETH on Coinbase results in rewards being reported on Form 1099-MISC annually.
- Coinbase's conversion of ETH to ETH2 when staking and potential re-conversion after the Shanghai upgrade creates taxable events.
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Taxation on Decentralized Platforms:
- Staking on decentralized platforms still incurs taxable income.
- Individuals have flexibility in determining when to report the income, either at the time of award or when rewards are unlocked.
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Timing of Staking Rewards and Tax Implications:
- The fair market value of cryptocurrency at the time of receipt determines taxable income.
- The timing of staking rewards matters due to the fluctuating value of ETH and the potential impact on taxable income.
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Advantages of Reporting Staking Income Early:
- Reporting income while rewards are locked may be advantageous, especially if the value of ETH increases post-upgrade.
- Early reporting can affect whether gains are categorized as long-term or short-term, influencing tax rates.
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Taxation upon Selling ETH or ETH2:
- Selling, swapping, converting, or trading ETH creates a taxable event.
- The amount initially reported as income serves as the cost basis, and capital gains tax applies to any profit upon sale.
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Setting Up a Dedicated Wallet for Staking Rewards:
- Creating a separate wallet for staking rewards before they are unlocked allows for better cost basis determination and potential tax savings.
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Converting ETH to ETH2:
- The final details of switching from ETH to ETH2 remain unknown.
- Current understanding suggests that the switch itself may not create a taxable event, but nuances may arise based on blockchain convergence.
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Professional Crypto Tax Assistance:
- Considering the complexity of cryptocurrency taxes, seeking help from experienced professionals, such as the Gordon Law Group, is recommended.
- These professionals can assist with tax preparation, strategies for minimizing tax liabilities, and ensuring a stress-free process.
In summary, understanding the tax implications of staking ETH2 is crucial, and consulting with knowledgeable tax professionals can provide valuable guidance in navigating this intricate terrain.
