IRS requires reporting of staking rewards as taxable income

Crypto rewards must be included in income once the taxpayer gains control over them, the IRS ruled

August 1, 2023 06:26 am

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US cryptocurrency investors must report staking rewards as taxable income.

The Internal Revenue Service (IRS) said on Monday that if a taxpayer stakes cryptocurrency on a proof-of-stake blockchain and receives rewards, the fair market value of those rewards should be included in the taxpayer’s gross income in the taxable year when they gain control over them.

“The fair market value is determined as of the date and time the taxpayer gains dominion and control over the validation rewards,” the agency said in a public administrative ruling.

The same rule applies if a taxpayer stakes cryptocurrency on a proof-of-stake blockchain through a cryptocurrency exchange and receives additional cryptocurrency units as rewards.

Staking refers to the involvement of individuals in the validation and verification of transactions on a proof-of-stake blockchain network.

When individuals stake their cryptocurrency, they help to keep the blockchain network secure and verify transactions. In return for doing this, they receive rewards in the form of extra tokens.

The rewards can vary between different blockchain networks, but it’s typical to earn returns of around 6% to 12% across DeFi protocols.

The legal guidance comes after US regulators took action against staking services provided by crypto exchanges, considering them as unlawfully offered securities.

The SEC targeted Binance.US and Coinbase’s staking-as-a-service programs, alleging violations of securities laws.

Meanwhile, Kraken faced two charges related to its staking products and settled both cases, paying $30 million and agreeing to discontinue the staking program earlier this year.

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