The taxation of staking rewards from cryptocurrency can be both very unclear and confusing. While many tax authorities have issued specific guidance for the taxation of cryptocurrency mining, it’s a very different story when it comes to staking. In this article, we will break down the current tax laws and regulations around staking rewards, and how to report this on your tax return.
Business or Hobby
Similar to the taxation of cryptocurrency mining, the first thing to do is to recognize if the staking activity will be classified as a business or just a hobby. The IRS has published some general guidelines regarding the distinction between a hobby and a business activity. Some of the considerations they say you should look at are:
- Do you maintain complete and accurate records of all your staking transactions?
- How much time and effort are you putting into the staking activity?
- Do you use any of the crypto received to pay for living costs or daily expenses?
- What is the total amount of value received from staking?
Whether you are staking as a business or just a hobby cannot always easily be determined in the eyes of the IRS as should be clear from the above list. It very much depends on several subjective considerations, but we can try to make some general distinctions.
If you are staking cryptocurrency of significant value, and use the staking rewards to pay for your day-to-day expenses such as food and rent, you will most likely be classified as conducting business activity. However, if you are only receiving small amounts of rewards directly to your exchange accounts such as Coinbase or Binance, your activity is most likely just a hobby.
Income Tax
Staking is in many ways similar to cryptocurrency mining even though the way in which new coins are created is different. The IRS has not issued specific guidance for the tax treatment of cryptocurrency received from staking, so the best we can do is assume the same tax treatment as for mining.
This means that any coins or tokens received as staking rewards should be taxed as income at the time of receipt (when you received the cryptocurrency in your wallet). The fair market value of the coins on the day you received them should be used as the basis for the taxable income. This rule applies to both staking as a business and a hobby.
Let’s look at this using a practical example. You have been staking Tezos (XTZ) on Coinbase and now you wonder how to calculate the taxable income. First, you need to calculate the value of the coins received in your local currency (eg. USD) for each day. Assuming you have received XTZ tokens on four occasions for simplicity, it will look like this:
| Tx No. | Date | Amount Received | XTZ Price | Taxable Income |
|---|---|---|---|---|
| 1 | 2020-05-01 | 43 XTZ | $2.75 | $118.25 |
| 2 | 2020-06-01 | 57 XTZ | $2.94 | $164.64 |
| 3 | 2020-07-01 | 53 XTZ | $2.27 | $120.31 |
| 4 | 2020-08-01 | 49 XTZ | $3.14 | $153.86 |
The total taxable income in this example is simply the sum of the fair market value for all transactions:
Taxable income:
$118.25 + $164.64 + $120.31 + $153.86 = $557.06
The total ordinary income from staking between May and August is $557.06 and should be reported as taxable income. If you are staking cryptocurrency and the activity is classified as just a hobby, you should include the taxable income amount as Other income on line 21 of Form 1040 Schedule 1.
If you struggle to keep track of the USD value (or the value in your local fiat currency) on each date you have received a cryptocurrency from staking, you may want to check out a crypto tax solution that does all the necessary calculations for you automatically, and can even let you generate PDF tax reports showing the total income amount you should report in your tax return.
Capital Gains Tax
In the US, cryptocurrencies are treated similarly to property for tax purposes. This means that each time you sell, trade, or otherwise dispose of a cryptocurrency, you need to calculate the capital gains and report this on your tax return. The selling of cryptocurrencies is subject to capital gains tax in almost all countries today with only very few exceptions.
Assuming that we later decide to sell 100 Tezos in our previous example above, we need to work out the capital gains which should be reported on IRS Form 8949 (USA). On the 15th of September 2020, XTZ is trading at $5.50, which means we receive $550 in USD. To calculate the capital gains we need to also know the cost basis. Using the FIFO method, we find the cost basis this way:
Cost basis:
$118.25 + $164.64 = $282.89
The resulting capital gains are then found as:
Capital gains:
$550 – $282.89 = $267.11
You would then need to report $267.11 as capital gains on Form 8949. As we have now discovered, we are taxed two times for cryptocurrency received as staking rewards: first when we receive the crypto in our wallet (income tax), and later when we sell the coins (capital gains tax).
If you want to learn more about calculating capital gains for cryptocurrencies, please refer to our in-depth tax guide which is updated regularly.
Possible Changes from the IRS
Recently, four US congressmen sent a letter to the IRS (July 29, 2020) saying that they want the IRS to tax staking rewards at the time you sell the cryptocurrency received from staking instead of the time you receive them. In this letter, the congressmen argue that the tax guidance for cryptocurrency mining is not directly applicable for staking rewards because of the way new coins are received by the person.
There has not yet been any official response from the IRS regarding this, but we can assume that the agency is aware of the concerns expressed and that they might come out with a new policy in the not-so-distant future. It’s important to understand that this would not change the taxable income amount for staking rewards, but simply delay the entire taxation into the future when the coins are actually sold instead of when they are received.
Coinpanda follows any updates or statements from the IRS closely, and we will update this article whenever there is any news or changes related to the taxation of staking.
Conclusion
The current tax laws regarding cryptocurrency received from staking are somewhat unclear in most countries as there has in most cases not yet been issued any guidance or policy paper specifically for staking rewards. Generally speaking, the conservative approach is to consider staking rewards similarly to cryptocurrency mining for tax purposes. This means that crypto received from staking is taxed both as income and then later as capital gains when you sell, trade, or otherwise dispose of the coins.
If you have a large number of incoming transactions to your wallet or exchange from staking, it will quickly become a difficult task to keep track of all the data and convert the amount received to USD or other fiat currencies. Coinpanda is a popular tax solution today and is used by thousands of cryptocurrency investors to automatically keep track of all transactions and effectively reconcile the crypto received to USD, CAD, AUD, or other fiat currencies. You can even download a complete income report that breaks down all the details and tells you exactly what you need to report in your tax return.
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