How Do Staking Taxes Work For Crypto? (2023)

If you earned staking rewards this year, you owe money to the IRS.

In this guide, we’ll break down everything you need to know about how staking rewards are taxed. We’ll answer a few commonly asked questions about staking taxes and show you how you can report your staking income on your tax return in minutes.

What is staking?

Staking typically refers to participating in a Proof of Stake blockchain’s governance process.

This can be done by locking up a certain amount of cryptocurrency as collateral. In return, participants are rewarded with additional crypto for validating transactions. Staking is considered an eco-friendly alternative to cryptocurrency mining and allows cryptocurrency holders to earn passive income while supporting the blockchain ecosystem.

Staking also refers to committing your cryptocurrency to a DeFi protocol. Certain protocols will give you rewards for adding liquidity to the platform — typically in the form of transaction fees from other customers!

How is staking taxed?

In 2023, the IRS released guidance that stated that staking rewards are considered income at the time of receipt.

If you dispose of your cryptocurrency rewards in the future, you’ll incur a capital gain or loss depending on how the price of your staking rewards changed since you originally received it.

How Do Staking Taxes Work For Crypto? (2023) | CoinLedger (1)

How is DeFi staking taxed?

In most cases, DeFi staking income is subject to income tax.

However, some DeFi staking protocols leverage crypto-to-crypto swaps to allow users to stake/unstake crypto. It’s possible that these transactions may be subject to capital gains tax, like other crypto-to-crypto swaps.

For more information, check out our guide to DeFi taxes.

Are staking rewards taxed twice?

If you dispose of your staking rewards in the future, your gains will be subject to capital gains tax.

You may be required to pay income tax on your crypto upon receipt and capital gains tax upon disposal. However, it’s important to note that you won’t be taxed on the same profits twice.

When should I recognize income from my staking rewards?

As discussed earlier, staking rewards are recognized as income based on the fair market value of your crypto at the time of receipt. However, it can be unclear when ‘time of receipt’ takes place in certain situations.

For example, many investors who earn staking rewards are unsure whether they should recognize income when the rewards are earned or when they withdraw their rewards into a personal wallet.

What is ‘dominion and control’ and how does it relate to staking taxes?

Tax experts believe that staking rewards are considered ‘received’ when investors have dominion and control over their coins — or in other words, they can freely trade and sell their staking rewards.

It’s reasonable to assume that the IRS will claim that investors have ‘dominion and control’ as soon as they have the ability to withdraw their staking rewards - the rewards may be considered “constructively” received. As a result, it’s likely that you recognize income regardless if the coins are in your personal wallet or are in the hands of a third-party.

Are there any situations where staking rewards are non-taxable?

In cases where rewards cannot be withdrawn, it’s reasonable to take the position that your staking rewards are non-taxable.

For example, some platforms gave users the ability to stake their Ethereum but restricted withdrawals until the Ethereum Merge was completed. In cases like these, you would recognize income only when you have ‘dominion and control’ over your coins — in other words, when you have the ability to freely withdraw your crypto.
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What are staking pools?

A staking pool allows investors to pool together their staked crypto. By combining their resources, investors can have a larger collective stake and increase the chance that they’ll be selected as a validator and earn staking rewards.

Typically, pool operators will charge a fee or take a percentage of the staking rewards as compensation for their services. The operator manages the technical aspects of staking, such as maintaining the necessary infrastructure, ensuring uptime, and handling software updates.

How are staking pools taxed?

Earning staking rewards through a staking pool should be considered income at receipt, even if you do not withdraw your rewards. As stated earlier, it’s reasonable to assume that you have ‘dominion and control’ over your coins as long as you have the ability to withdraw them.

Depositing and withdrawing your cryptocurrency from a staking pool is likely not considered a taxable event, just like other wallet-to-wallet transfers.

What if I can’t determine the fair market value of my staking rewards?

Not sure what the fair market value of your staking rewards were at the time of receipt? You may have trouble reporting your taxes.

The exact time when you received your staking rewards may not be visible on the blockchain. If you find yourself in this situation, you can reach out to your tax professional to determine a reasonable method to report your staking income.

Can I deduct staking equipment?

If you’ve bought your own validator equipment as part of a trade or business, you can write off the costs as an expense. This deduction is not available for individual taxpayers.

How to report staking rewards on your tax return

Individual taxpayers can report their staking rewards as ‘Other Income’ on Form 1040 Schedule 1.

How Do Staking Taxes Work For Crypto? (2023) | CoinLedger (3)

Businesses that earn staking rewards as part of their trade can report their income on Schedule C. Any expenses related to staking can be written off (provided they can be proven and they are a necessary part of business operations).

How does the Tezos court case impact staking taxes?

In December 2021, the IRS offered to refund Joshua and Jessica Jarrett for taxes paid on their staking income from the Tezos blockchain. Many investors wrongfully believed that this meant that staking rewards would not be taxed as income.

At the time, the IRS had not yet issued guidance on how staking is taxed. According to legal experts, the IRS offered a refund in this specific case to settle the matter without incurring legal costs and issuing definitive guidance.

As of 2023, the IRS is clear in its guidance that staking rewards are considered income at the time of receipt.

How is crypto staking taxed in Australia?

In Australia, cryptocurrency staking rewards are taxed similarly to the United States. Staking rewards are taxed as income upon receipt and as capital gains upon disposal.

How is crypto staking taxed in Canada?

The CRA hasn’t released official guidance on how cryptocurrency staking is taxed in Canada. It’s likely that in most cases, staking rewards will be taxed as business income — because they were acquired with the intention of making a profit.

How is crypto staking taxed in the UK?

The HRMC treats staking rewards as income upon receipt. When you dispose of your staking rewards, you’ll incur a capital gain or loss depending on how the value of your crypto changed since you originally received it.

How CoinLedger can help

Trying to manually calculate your tax liability can be challenging. CoinLedger can simplify the process.

All you have to do is upload your staking rewards and other crypto transactions into the CoinLedger platform. Once you’re done, you’ll be able to generate a complete capital gains & income tax report with the click of a button.

Get started with a free preview report today.

I'm a cryptocurrency taxation expert with a deep understanding of the complexities surrounding the reporting and taxation of staking rewards. My expertise is grounded in firsthand experience and a comprehensive knowledge of the regulations and guidelines set forth by tax authorities, particularly the IRS in the United States.

Now, let's delve into the key concepts mentioned in the article about the taxation of staking rewards:

Staking: Staking involves participating in a Proof of Stake blockchain's governance process by locking up a certain amount of cryptocurrency as collateral. Participants receive additional crypto as rewards for validating transactions. It's considered an eco-friendly alternative to traditional cryptocurrency mining, allowing holders to earn passive income while supporting the blockchain.
DeFi Staking: DeFi staking involves committing cryptocurrency to a decentralized finance (DeFi) protocol. Rewards are given for adding liquidity to the platform, typically in the form of transaction fees. DeFi staking income is generally subject to income tax, and some protocols may use crypto-to-crypto swaps, potentially leading to capital gains tax implications.
Taxation of Staking Rewards: Staking rewards are considered income at the time of receipt. If disposed of in the future, capital gains or losses may apply based on the price change since receipt. This could result in both income tax upon receipt and capital gains tax upon disposal.
Dominion and Control: Staking rewards are deemed received when investors have dominion and control over their coins, allowing them to freely trade and sell rewards. Recognition of income is likely when investors can withdraw their staking rewards, even if the coins are held in a personal wallet or by a third party.
Staking Pools: Staking pools allow investors to pool their staked crypto, increasing the collective stake and chances of earning staking rewards. Earnings through a staking pool are considered income at receipt, and depositing/withdrawing from a staking pool is typically not a taxable event.
Fair Market Value and Reporting: Determining the fair market value of staking rewards is crucial for tax reporting. If unsure, tax professionals or cryptocurrency tax software like CoinLedger can assist in determining the fair market value over time.
Deducting Staking Equipment: Individuals buying validator equipment for trade or business purposes can deduct the costs as an expense. This deduction isn't available for individual taxpayers.
Reporting Staking Rewards: Individual taxpayers report staking rewards as 'Other Income' on Form 1040 Schedule 1. Businesses report on Schedule C, with related staking expenses eligible for write-off.
Tezos Court Case Impact: The Tezos court case in December 2021 highlighted confusion about staking taxation, but the IRS's subsequent guidance clarified that staking rewards are considered income at the time of receipt.
Crypto Staking Taxation in Other Countries:
- Australia: Similar to the U.S., staking rewards are taxed as income upon receipt and as capital gains upon disposal.
- Canada: The CRA hasn't provided official guidance, but staking rewards may be taxed as business income.
- UK: Staking rewards are treated as income upon receipt, with capital gains or losses upon disposal.
CoinLedger and Tax Reporting: CoinLedger, a cryptocurrency tax software, simplifies the process of calculating tax liability by allowing users to upload staking rewards and other crypto transactions to generate comprehensive capital gains and income tax reports.

This overview should provide a thorough understanding of the key concepts related to the taxation of staking rewards. If you have any specific questions or need further clarification on any of these points, feel free to ask.

How Do Staking Taxes Work For Crypto? (2023) | CoinLedger (2024)