Introduction
Crypto staking has become a popular method for investors to earn passive income, but many are unaware that staking rewards are taxable. The IRS treats these earnings as taxable income, requiring investors to report them properly to avoid potential penalties.
Understanding how staking rewards are taxed and how to report them correctly is essential for maintaining compliance with IRS regulations. This guide provides an overview of crypto staking tax rules, tax reporting steps, and potential deductions.
Is Crypto Staking Taxable?
Yes, crypto staking rewards are taxable in the U.S. The IRS considers staking rewards as ordinary income, meaning they must be reported on your tax return in the year they are received.
How the IRS Classifies Staking Income
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Proof of Stake (PoS) Rewards – Earned by participating in blockchain validation.
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DeFi Staking and Liquidity Pool Rewards – Interest-like earnings from decentralized finance platforms.
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NFT Staking Rewards – Tokens or coins earned for staking non-fungible tokens.
Regardless of the staking method, the fair market value (FMV) of rewards at the time of receipt determines the taxable amount.
How Are Crypto Staking Rewards Taxed?
Staking rewards are subject to two types of taxation:
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Ordinary Income Tax – Applied when staking rewards are received.
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Capital Gains Tax – Applied when selling, exchanging, or disposing of staked rewards.
Taxation of Proof of Stake Rewards
PoS rewards are taxed as ordinary income when they are received and accessible. The IRS defines this as having dominion and control, meaning the ability to transfer, sell, or use the rewards.
If PoS rewards are locked for a set period (such as ETH2 staking), they are not taxable until they become withdrawable and under the staker’s control.
Taxation of DeFi Staking and Crypto Interest
DeFi staking rewards can be taxed differently depending on the platform’s mechanics.
Example 1: Earning More of the Same Token
Maria stakes 3 ATOM tokens in Cosmos. As long as she keeps them staked, she receives additional ATOM deposits in her wallet. Each deposit is taxed as ordinary income, based on FMV at receipt.
Example 2: Using Protocol or Placeholder Tokens
Bob deposits 3 ETH into Compound and receives 3 cETH in return.
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The swap of ETH to cETH is treated as a taxable crypto-to-crypto trade, triggering capital gains or losses.
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When Bob converts cETH back to ETH, another taxable event occurs, resulting in additional gains or losses.
Taxation of NFT Staking Rewards
Staking NFTs for rewards is also taxable.
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Any earned tokens or coins must be reported as income at FMV upon receipt.
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If staking rewards are later sold, they may generate capital gains or losses.
IRS Rules on Crypto Staking Taxes
The IRS clarified staking taxation in Revenue Ruling 2023-14, stating:
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Staking rewards are taxed as income when received, not when sold.
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The taxable amount is based on FMV at receipt.
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Selling staking rewards triggers capital gains tax, calculated using the initial reported income as cost basis.
Common Misconception: Are Staking Rewards Taxed Only When Sold?
No. Some taxpayers mistakenly believe staking rewards are not taxable until they are sold. This was debated in a 2022 tax case, but the ruling did not change IRS policy—staking rewards must be reported as income when received.
Can You Deduct Staking-Related Expenses?
Yes, certain staking-related expenses may be deductible, such as:
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Hardware costs (staking nodes, servers).
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Electricity expenses (for running validation nodes).
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Transaction fees (gas fees for staking and claiming rewards).
Hobby vs. Business Classification
The IRS typically classifies staking as a hobby, meaning deductions are limited to the amount of staking income earned. If staking is part of a business operation, more deductions may be available.
How to Report Crypto Staking on Taxes
1. Gather All Transaction Records
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Download staking reward reports from exchanges or platforms.
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Collect Form 1099-MISC if issued by the exchange.
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Track FMV for each reward at the time of receipt.
2. Report Staking Rewards as Ordinary Income
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Include staking income on Schedule 1 of Form 1040.
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Use FMV at receipt to calculate taxable income.
3. Report Capital Gains or Losses from Staking Rewards
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If staking rewards are later sold, exchanged, or spent, report the transaction on Form 8949.
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Transfer totals to Schedule D to summarize capital gains and losses.
4. File Taxes and Pay Any Owed Amounts
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Ensure accurate reporting to avoid IRS penalties.
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Consider professional tax assistance for complex staking transactions.
Conclusion
Crypto staking rewards are subject to taxation as ordinary income upon receipt and capital gains when sold. Proper reporting is essential to maintain IRS compliance and avoid tax penalties.
Block3 Finance provides expert guidance in crypto tax reporting, staking income classification, and tax optimization strategies to help investors navigate IRS regulations effectively.
If you have any questions or require further assistance, our team at Block3 Finance can help you.
Please contact us by email at inquiry@block3finance.com or by phone at 1-877-804-1888 to schedule a FREE initial consultation appointment.
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