- The IRS issued Revenue Ruling 2023-14, providing guidelines on taxing income from staking digital assets.
- Staking has emerged as a significant area of disagreement among lawmakers.
As per a recent ruling by the top tax authority in the United States, crypto investors must declare their earnings from crypto staking rewards as gross income for the year they were received. On July 31, the Internal Revenue Service issued Revenue Ruling 2023-14, offering clear guidelines on how to handle income generated through staking digital assets for tax purposes.
Excerpt from Rev. Rul. 2023-14. Source: IRS
Gross income encompasses earnings obtained in various ways, whether through money, property, services or, in this case, staking rewards. This ruling applies to cash-method taxpayers who receive cryptocurrencies as compensation for validating transactions on proof-of-stake blockchains. Whether they stake cryptocurrency directly or do so through a centralized crypto exchange is relevant.
The ruling dictates that individuals must add the fair market value of the crypto rewards to their yearly income and assess it when they receive the assets. The term “Dominion” was defined as the period during which the investor possesses the authority and capability to sell, trade, or otherwise manage the cryptocurrency rewards.
Before this ruling, the IRS imposed income and capital gains tax on crypto-mining rewards but did not have specific guidelines for staking rewards, as reported by crypto tax firm Koinly. Ryan Selkis, the founder of Messari, asserts that the IRS is treating crypto staking akin to the treatment of stock dividends.
What PoS blockchains do at scale is embed state-level taxes into their protocols.
The IRS says PoS rewards should be included in gross income, which means crypto has taken the concept of a “stock dividend” and made it taxable.
You get a taxed for slicing a pizza in 10 vs. 8. pic.twitter.com/3qlm6lAGQv
— Ryan Selkis 🪳 (@twobitidiot) July 31, 2023
Jason Schwartz, a tax partner and co-head of digital assets at Fried Frank, expressed his view on the ruling, stating, “Although the ruling is not unexpected, it remains disheartening.” He further elaborated, “Tax law has traditionally demanded the presence of a payer, like an employer or another party, for taxable income to be attributed to an individual. Even discoveries of treasure troves are considered deferred payments.”
IRS: “STAKING REWARDS ARE INCOME”
Today the IRS issued Revenue Ruling 2023-14 confirming its view that consensus-layer staking rewards are taxed at FMV when the staker has dominion and control over them (i.e., the ability to sell them). A brief🧵…
— CryptoTaxGuy.ETH ⌐◨-◨ 🦇🔊🛡️ (@CryptoTaxGuyETH) July 31, 2023
The IRS tax bulletin arrives amid a period when U.S. federal regulators, including the Securities and Exchange Commission, focus on crypto-staking service providers and exchanges, alleging that they are engaging in unlawful sales of securities.
Potential Increase in Lawsuits as Regulatory Clarity Evolves
The IRS has been consistently making news due to its examination of the crypto asset class. In a recent incident, Consensys supported a lawsuit against the IRS regarding the taxation of staked crypto. The lawsuit involved a couple from Tennessee seeking to reclaim federal income taxes.
Staking has emerged as a significant area of disagreement among lawmakers. As regulatory clarity and new laws are emerging, more lawsuits related to staking are likely to arise.
In addition to seeking tax payments on staking-related earnings, the IRS is taking further actions. A judge issued an order compelling the Kraken crypto exchange to provide user information to the IRS. The agency requested data on users who conducted cryptocurrency trading amounting to at least $20,000.
Kraken has labeled this request as an “unjustified treasure hunt” and has contested it. The exchange attempted to prevent the crypto tax investigation but was unsuccessful. Furthermore, Kraken is reportedly preparing to establish its bank, as reported in March 2023.
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