If you’re curious about how the IRS views crypto staking and how to report staking income for tax purposes, this article is for you. In this article, we will discuss the latest IRS guidance, the need to determine the Fair Market Value (FMV) of earned staking rewards, reporting staking income on your tax return, and potential requirements for estimated tax payments. It also delves into the IRS vs. Jarretts court case, highlighting the ongoing debate about the tax treatment of staking rewards.
How the IRS views crypto staking
The Internal Revenue Service (IRS) and its approach to regulating cryptocurrencies have evolved since the agency issued guidance on cryptocurrency for the first time. In the early days of crypto, there was little regulatory clarity surrounding crypto assets and how they should be taxed, except that the IRS viewed all cryptocurrencies as property for tax purposes, subjecting them to capital gains tax when sold, exchanged, or disposed of. Without any mention of staking or staking rewards from the IRS, many U.S. taxpayers felt unsure about how and if staking rewards should be reported.
So how does the IRS view crypto staking from a tax perspective today?
The latest IRS guidance (Notice 2014–21) on cryptocurrencies does not specifically address crypto staking. However, this guideline clearly states that mining rewards should be considered taxable income, so a logical assumption is to consider staking rewards to be taxed similarly since the nature of earning mining and staking rewards share much in common.
The only direct mention of crypto staking by the IRS can be found on the Digital Assets page on their website:
Taxable income, gain or loss may result from transactions including, but not limited to:
(…) Receipt of a new digital asset as a result of mining or staking activitiesThe IRS
While this does not represent an official stance on how the IRS views staking rewards, it indicates that the IRS wants staking rewards to be taxed as income at the time of receipt and should be reported on the individual’s tax return.
It’s important for taxpayers to understand that even if the staking rewards are not immediately sold or converted into fiat currency, they still have a tax liability on the fair market value of the rewards when they are received.
Reporting crypto staking to the IRS
The first step is determining the Fair Market Value (FMV) of the crypto received, which is the basis for tax reporting. It is essential to accurately calculate the income by considering the FMV of the staking rewards when they are credited to your wallet. The next step involves reporting the income on Schedule 1 (Form 1040) by including the total U.S. dollar amount of staking rewards on Line 8: “Other income.”
Finally, taxpayers should be aware of the potential need to make estimated tax payments throughout the year to cover income not subject to withholding, such as cryptocurrency staking income. Failure to make estimated tax payments when required can result in penalties.
Read our separate article How to Report Crypto Staking Income to learn more.
Requirements for record-keeping
It’s worthwhile mentioning best practices and requirements from the IRS for record-keeping of staking activities. As a minimum, this includes documenting the date and value of the staked assets, the fair market value of the staking rewards at the time of receipt, and any related expenses.
Maintaining good records is not only vital to be able to calculate and report your staking income accurately but also required in case you get audited by the IRS in the future. Crypto tax calculators such as Coinpanda can automate this process for you.
IRS vs. Jarretts: crypto staking court case
Many crypto investors and also regulation experts have been vocal about their opinion that the IRS’ statement regarding staking rewards is not clear and that it could be challenged from a legal view. The root of the discussion is that the IRS is very clear about taxing cryptocurrencies as property which can be viewed as conflicting with the assumption that staking rewards should be taxed as income.
Using this argument, Josh and Jessica Jarrett, based in Nashville, requested a refund from the IRS for taxes paid on their Tezos staking rewards in 2019. However, the IRS denied their refund request initially and responded that the couple had to file a federal lawsuit. Dissatisfied with the lack of response from the IRS regarding their refund claim, they pursued legal action.
In December 2021, the Jarretts received a letter from the government offering a full refund of $3,793 plus interest for their 2019 staking taxes. This news garnered attention within the crypto industry, with several news sites claiming it set a precedent that staking rewards should be tax-free like other newly created property. However, upon further discussions with the IRS, the Jarretts realized that the refund did not guarantee that tokens created through staking would not be viewed as taxable income. Concerned about the lack of an official court ruling and the possibility of the IRS challenging them again on the issue, they decided to refuse the government’s refund offer on January 25, 2022, seeking a clearer resolution to their case.
The latest news about this saga is that their suit was dismissed in October 2022 after a Tennessee district court ruled that the refund payment rendered the case moot. Josh Jarret responded shortly after that they were planning to appeal the decision.
No news regarding the case has surfaced since this tweet in October 2022, but we are keeping an eye on the case and will update this article as soon as there is an update.
Future predictions for IRS and crypto staking
As the cryptocurrency landscape continues to evolve, the IRS will likely further refine its regulations and approach to crypto assets as a whole. One potential area of focus could be the classification and regulation of staking rewards, considering the popularity that crypto staking has gained recently. Ethereum’s transition from PoW to PoS in 2022 has also introduced staking to many more crypto investors, and we can only assume that the IRS will need to address crypto staking more specifically sooner rather than later.
As of today, the discussion surrounding staking rewards is centered around the fact that cryptocurrency is classified as property by the IRS, and thus taxing staking rewards as income might not be in line with the current tax law. Although this is an important discussion that should not be neglected, most tax professionals agree that reporting staking as income is the safest approach until we get further clarifications from the IRS.
Additionally, as the popularity of crypto staking grows, the IRS may implement more stringent reporting requirements and enforcement mechanisms. This could include introducing specialized forms or reporting mechanisms specifically designed for staking activities. Given the decentralized nature of blockchain networks, the IRS may also explore collaborations with international tax authorities to address cross-border staking transactions and ensure global tax compliance.
It is essential for taxpayers to stay informed about potential changes and adapt their tax strategies accordingly to remain in compliance with evolving regulations surrounding crypto staking and taxation. At Coinpanda, we stay up-to-date about all the latest tax regulations surrounding cryptocurrency and staking, and we will update this article whenever the IRS issues any new statements or guidances about crypto staking in the future.