Taxpayers Must Include Staking Rewards in Gross Income

IRS Guidance Declares That Taxpayers Must Include Staking Rewards in Gross Income


On July 31, 2023, the Internal Revenue Service (IRS) released Revenue Ruling 2023-14, which concludes that the fair market value of staking rewards received by a cash-method taxpayer is includible in the taxpayer’s gross income for the tax year in which the taxpayer gains “dominion and control” over the staking rewards.

In this article, we explore several tax considerations for taxpayers who are engaged in cryptocurrency staking activities.

In Depth


The IRS’s guidance comes on the heels of oral arguments before the US Court of Appeals for the Sixth Circuit in Jarrett v. United States, No. 22-6023 (6th Cir. 2023), a closely followed case where the question before the Court was whether the receipt of staking rewards generates taxable income at the date the rewards are received.

The Revenue Ruling considered a simple fact pattern in which a specific cryptocurrency (M) is validated by a proof-of-stake consensus mechanism. A cash-method taxpayer (A) owning 300 units of M stakes 200 of the units and validates a new block of transactions on the M blockchain, receiving two units of M as validation rewards. Pursuant to the cryptocurrency protocol, for a brief period, A cannot sell, exchange, or otherwise dispose of any interests in the two units of M in any manner until a later date. A did not convert any of its validation rewards into cash or other property. On the basis that the two units of M represent A’s reward for staking units and validating transactions on the M blockchain, the IRS held that because A has accession to wealth as A gains dominion and control through its ability to sell, exchange, or otherwise dispose of the two units of M, the fair market value of the two units of M is included in A’s gross income for the taxable year that includes when A received dominion and control. The same holding applies if A had staked M through a cryptocurrency exchange and received additional units of M as validation rewards. Such guidance is consistent with Notice 2014-21, where the IRS stated that a taxpayer who “mines” cryptocurrency must include the fair market value of the cryptocurrency received in the taxpayer’s gross income in the tax year the taxpayer obtains dominion and control of the cryptocurrency.

While the Revenue Ruling seems straightforward in that all staking rewards should be included in gross income when a taxpayer has the ability to either transfer, withdraw or otherwise dispose of such staking rewards, the Revenue Ruling is light on facts that pertain to the specific mechanics of the cryptocurrency and blockchain in question. For example, the Revenue Ruling does not detail whether the staking rewards are newly created tokens or a reallocation of tokens from a preexisting pool of tokens that are transferred to the taxpayer for services performed. Such distinction has been cited as relevant for taxpayers, including Jarrett, who argue staking rewards should not be included in gross income on the basis that the creation of new property is not taxable income. However, for proof-of-stake blockchains that reallocate a preexisting pool of tokens to taxpayers who provide services through validation, recognizing income for services performed has been subject to less scrutiny.


For individual taxpayers who receive tokens as part of staking rewards and include the fair market value of the rewards in gross income (as ordinary income for services performed), there could be a character mismatch to the extent that the taxpayer later disposes of such tokens, resulting in an income tax liability without sufficient cash. For example, if a taxpayer obtained dominion and control over 10 ether tokens (ETH) in May 2021 at a price per token of $3,900 and disposed of all such tokens within that same year for $1,900, the taxpayer will have recognized $39,000 of ordinary income and $20,000 of short-term capital loss in the same year attributable to the same asset. Given that short-term capital loss cannot be used to offset more than $3,000 of ordinary income (or $1,500 in the case of married taxpayers who file separate tax returns), the taxpayer is left with $17,000 of capital losses that cannot be used to offset the ordinary income that resulted from the same property.

While the same character mismatch exists outside of the world of cryptocurrency, such risk could be more prevalent for taxpayers who are involved in staking activities to the extent the taxpayer loses all of the rewards to “slashing,” a mechanism built into blockchain protocols to discourage validator misbehavior whereby validators can lose or forfeit a predefined percentage of its tokens. Slashing can be triggered by either validator downtime (where the validator is either offline for some time), double signing (the validator is operating on two different servers) or other misbehavior. The Revenue Ruling does not address the tax treatment of slashing. However, depending on what happens to the “slashed” tokens, (i.e., are they redistributed to other validators or are they burned?), there is a chance that the IRS could assert that slashing results in gain or loss treatment to the taxpayer.


While the Revenue Ruling clarifies how the IRS plans to tax staking rewards, administrative guidance like this is only a display of an official interpretation by the IRS of existing tax law, as applied to a specific set of facts. Such guidance is not binding on the courts and does not have any force of law or the authoritative weight of regulations.

Since early 2023, the IRS has undertaken several pieces of administrative guidance that each covers a discrete issue in areas in which taxpayers have requested direction. However, given the limited set of facts and analysis with each one, taxpayers are often left with more questions than answers. A comprehensive framework by the legislature is needed to bridge the gap between taxation and digital assets so that taxpayers have guidance they can rely on with certainty.

If you have questions about the tax implications of staking activities, please do not hesitate to contact the authors of this article or your regular McDermott contact(s).