Introduction
Staking cryptocurrency is a popular way to earn passive income, but many investors are caught off guard when they realize their staking rewards are taxable. Whether you stake crypto through an exchange, participate in DeFi lending, or earn rewards from NFT staking, understanding how staking taxes work is crucial for staying compliant with the IRS.
This guide explains how staking rewards are taxed, the latest IRS rules, and how to report your earnings on your tax return.
Is Crypto Staking Taxable?
Yes, crypto staking rewards are taxable in the United States. When you stake cryptocurrency, you earn rewards for helping secure the network or providing liquidity. The IRS considers these rewards as taxable income, which must be reported on your tax return.
Pro Tip: Many exchanges report staking rewards on Form 1099-MISC. If you receive this form but fail to report your staking rewards, you could be targeted for an IRS audit.
How Are Staking Rewards Taxed?
1. Staking Rewards as Ordinary Income
The IRS treats staking rewards as ordinary income at the moment you gain "dominion and control" over them. This means you must pay tax on the fair market value of the rewards at the time you receive them.
However, staking rewards can be earned in different ways, and the taxation varies based on how they are obtained.
2. Taxes on Proof of Stake (PoS) Rewards
Proof of Stake (PoS) networks—like Ethereum, Cardano, and Polkadot—reward validators with newly minted cryptocurrency.
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Tax treatment: PoS rewards are taxed as ordinary income at the moment they are received.
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If rewards are locked: If staking rewards are locked (such as ETH2 staking), the IRS states they are not taxable until you can withdraw and trade them.
3. Taxes on DeFi Staking and Crypto Interest
DeFi staking works differently from PoS staking. It often involves depositing tokens into a liquidity pool or lending protocol in exchange for interest payments or protocol-specific tokens.
Example 1: Earning More of the Same Token
Maria stakes 3 ATOM tokens in the Cosmos network. As long as she keeps those 3 ATOM staked, she receives additional ATOM rewards in her wallet. Each reward is taxable as ordinary income at the time of receipt.
Example 2: Using Protocol or Placeholder Tokens
Bob deposits 3 ETH into Compound, a DeFi platform. In return, he receives 3 cETH (Compound ETH).
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When Bob receives cETH: The swap from ETH to cETH is treated as a taxable event because he received a different asset.
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When Bob converts back to ETH: The increase in value from 3 ETH to 5 ETH results in capital gains tax.
4. Taxes on NFT Staking Rewards
Some NFT projects allow users to stake their NFTs in return for rewards.
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NFT staking rewards are taxable as ordinary income when received.
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The fair market value of the tokens at the time of receipt must be recorded for tax purposes.
IRS Rules for Crypto Staking Taxes (2025 Update)
The IRS issued Rev. Rul. 2023-14, clarifying how staking rewards should be taxed:
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Staking rewards are taxable as income when you have dominion and control over them.
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You must determine the fair market value of rewards at the time of receipt.
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When you sell, trade, or dispose of staking rewards, they are subject to capital gains tax.
Misconception Alert: Many investors believe staking rewards aren’t taxable until they’re sold—this is false. A past tax case gave the illusion that staking rewards were untaxed until sold, but it had no effect on IRS policy.
Can You Deduct Staking Expenses?
Yes, you may be able to deduct staking-related expenses such as:
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Hardware and equipment costs (for running a validator node)
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Electricity costs (if you stake using personal hardware)
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Transaction fees paid for staking activities
However, staking is generally classified as a hobby rather than a business, meaning deductions are limited. A tax professional can determine if your expenses qualify.
How to Report Staking Rewards on Your Tax Return
1. Gather Your Crypto Tax Documents
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Download Form 1099-MISC from exchanges (if applicable).
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Export your transaction history from wallets and DeFi platforms.
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Record the fair market value of rewards at the time of receipt.
2. Report Staking Rewards as Income
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Staking rewards are reported on Schedule 1 (Form 1040) as "Other Income."
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If staking is part of a business, report it on Schedule C, and claim deductions for eligible expenses.
3. Calculate Capital Gains and Complete Form 8949
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If you sell, swap, or trade staking rewards, calculate capital gains/losses.
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Report these transactions on Form 8949.
4. Transfer Totals to Schedule D
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Add your capital gain/loss totals from Form 8949 to Schedule D.
5. File Your Tax Return and Pay On Time
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Ensure your tax return is accurate and submitted before the deadline to avoid IRS penalties.
Conclusion
Crypto staking rewards are taxable, and failing to report them can result in IRS scrutiny. Whether you stake Ethereum, Solana, Cosmos, or participate in DeFi staking, you must calculate the fair market value of rewards at receipt and track any capital gains when selling.
If handling staking taxes sounds overwhelming, Block 3 Finance can help you accurately report your staking income and minimize your tax liability. Our team specializes in crypto tax compliance, reporting, and audit defense.
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.
You may also visit our website (www.block3finance.com) to learn more about the range of crypto services we offer to startups, DAOs, and established businesses.