The IRS’ crypto tax guidance is a slow creep toward rationality

Their current stance is a half-baked attempt that could stifle innovation and burden an emerging industry

OPINION
article-image

Midjourney modified by Blockworks

share

In 2022, the crypto world was captivated by a lawsuit that wasn’t about Coinbase, Ripple or Grayscale. It was about Joshua and Jessica Jarrett, two Tennessee taxpayers who took on the IRS over Tezos tokens created through staking. Instead of choosing a position, the IRS demurred, sent a refund, and the case was dismissed. 

This left the crypto community, eager for regulatory guidance, in limbo. Fast forward to July 31, 2023, and the IRS has released new guidance on staking rewards. 

Spoiler alert: It’s a mess. 

The IRS’s new stance is inconsistent with current tax laws and burdens staking providers.

Why is this so complicated? 

Well, as with all things crypto, staking is anything but straightforward. At times, staking can feel like mining — you validate a few blocks, and suddenly, a coin is deposited into your wallet, ready for immediate use. That certainly feels like income. 

But more often than not, unlocking those staking rewards is a Herculean task. You might have to unstake your assets, wait out a period or even navigate a vesting schedule. In these cases, labeling it as “’instant income” is a tough sell.

The IRS’s misguided approach

The IRS has decided that staking rewards should be included in gross income the moment the taxpayer controls them. But remember, these revenue rulings aren’t law; they’re more like “strong suggestions.” 

The IRS’s opinion is just that — an opinion. And it’s one that courts, especially the Tax Court, don’t necessarily have to follow. So, before you start calculating how much you owe Uncle Sam for your staking rewards, remember that this isn’t set in stone.

The art of taxation: Why creating value isn’t the same as earning income

Tax law is like a Rubik’s Cube — complicated but solvable. The IRS’s broad definition of gross income comes with caveats. You’re not taxed for creating value; you’re taxed when that value is realized through a sale or exchange. This principle is rooted in case law and IRS rulings that have stood the test of time. 

For instance, if you’re an artist and you create a painting, you’re not taxed on the value of that painting when you finish it. You would be taxed on any income you earn from selling the painting. Wouldn’t the same hold true for digital assets? The IRS doesn’t think so.

Let’s delve into the IRS’s glaring omissions. The ruling is mum on whether tokens received from staking are “newly created property” for which the taxpayer is the original owner, which could land them in the bucket of nontaxable self-created property.

The ruling does make a passing mention that “validation rewards typically consist of newly created units of cryptocurrency.” However, this statement is conspicuously absent from the IRS’s core arguments. It’s like saying, “We know it, but we won’t admit it.”

The IRS also conveniently sidesteps key elements of landmark cases. Take the US Supreme Court case Commissioner v. Glenshaw Glass Co., which defines income as “undeniable accessions to wealth, clearly realized, and over which the taxpayers have complete dominion.” The IRS ruling acknowledges “accessions to wealth” and “complete dominion,” but is eerily silent on the “clearly realized” part.

Read more from our opinion section: Yes, crypto is ready for Wall Street

Moreover, the IRS disregards a century of case law supporting the non-taxability of self-created property. They can’t just ignore Supreme Court rulings like Eisner v. Macomber, which established that income isn’t taxable until realized, or Anschutz v. Commissioner, which reinforced that a taxable event occurs upon sale or exchange, not creation.

The unbearable weight of staking taxes

Locked rewards aren’t taxable until you can use them, but the IRS’s guidance would create an administrative nightmare and force stakers into financial gymnastics just to pay their tax bills. 

If you declare your staking rewards as immediate income, you’re cornered into unenviable choices: Liquidate your new tokens, compromising network security; halt some staking, reducing your holdings; divert other investment funds; or, heaven forbid, evade taxes (don’t do it). And let’s not forget the phantom income menace — owing taxes on tokens that have tanked in value by tax season. You could be taxed on “ghost money.”

A missed opportunity for the IRS

The IRS’s guidance leaves us with more questions than answers. From slashing penalties to the tax obligations of foreign stakers, the IRS has a lot more explaining to do. 

Should slashing penalties be considered ordinary losses if rewards are ordinary income? The IRS is tight-lipped. Do foreign stakers owe US income tax if they delegate staking to US nodes? Could this be considered a “US trade or business?” Will the standard 30% withholding tax apply to these foreign stakers? How will liquid staking assets like Lido’s stETH be treated? Many argue they should qualify for capital gains treatment. Until these questions are answered, the tax landscape for staking remains as clear as mud.

The IRS had a golden opportunity to craft nuanced regulations for this complex area of tax law. Instead, they’ve given us a one-size-fits-all approach that fits no one. This issue is far from settled and is likely headed for the courtroom unless Congress steps in. 

The IRS’s guidance is a half-baked attempt that could stifle innovation and burden an emerging industry. It’s time for a more thoughtful approach.



Get the news in your inbox. Explore Blockworks newsletters:

Tags

Upcoming Events

Old Billingsgate

Mon - Wed, October 13 - 15, 2025

Blockworks’ Digital Asset Summit (DAS) will feature conversations between the builders, allocators, and legislators who will shape the trajectory of the digital asset ecosystem in the US and abroad.

Industry City | Brooklyn, NY

TUES - THURS, JUNE 24 - 26, 2025

Permissionless IV serves as the definitive gathering for crypto’s technical founders, developers, and builders to come together and create the future.If you’re ready to shape the future of crypto, Permissionless IV is where it happens.

Brooklyn, NY

SUN - MON, JUN. 22 - 23, 2025

Blockworks and Cracked Labs are teaming up for the third installment of the Permissionless Hackathon, happening June 22–23, 2025 in Brooklyn, NY. This is a 36-hour IRL builder sprint where developers, designers, and creatives ship real projects solving real problems across […]

recent research

Research Report Templates (1).jpg

Research

Jupiter has emerged as the undisputed liquidity backbone of Solana, commanding over 90% of spot DEX aggregation and 80% of perp trading volume. But behind the numbers lies a far more ambitious play: a cross-chain, vertically integrated super-app spanning swaps, synthetics, NFTs, memecoins, and launchpads. This report explores Jupiter’s rapid rise, the monetization upgrades reshaping its revenue profile, and the risks that could unwind its dominance, from token dilution to competition. With annualized revenues nearing $300M, the upside is undeniable, if it can navigate the turbulence.

article-image

Financial advisers in a January survey said equity ETFs were their top choice for gaining crypto exposure in 2025

article-image

“Why put a target out there that’s really speculative, not knowing exactly where this environment is going to go?” CarMax CEO Bill Nash said

article-image

While the head of Base may support legal sex work, Coinbase policies prohibit said workers from using its exchange.

article-image

EVM bottlenecks fundamentally hold back Ethereum’s scalability

article-image

In 2011, WikiLeaks faced a financial blockade imposed by the US government. It was Bitcoin’s first major test.

article-image

Kado’s founder Emery Andrew spoke to Blockworks about the acquisition and what’s next for the team