The Internal Revenue Service (IRS) issued Revenue Ruling 2023-14, stating that U.S. crypto investors must report crypto staking rewards as gross income in the year of receipt.
Effective from July 31st, this ruling applies to cash-method taxpayers receiving crypto as remuneration for validating transactions on proof-of-stake blockchains, either directly or through centralized crypto exchanges.
“The fair market value is determined as of the date and time the taxpayer gains dominion and control over the validation rewards.”
“Dominion” is defined as the point when the investor gains control over the cryptocurrency rewards, allowing them to sell, exchange, or dispose of them. The fair market value of the rewards is included in annual income and determined at the time of receipt.
The IRS previously had no provisions for staking rewards; only subjecting crypto-mining rewards to income and capital gains tax.
Staking rewards are taxed as gross income once sold, preventing recipients from taxing locked dividends until they can exercise “dominion and control” over them. The IRS treats crypto staking similarly to stock dividends.
Messari founder Ryan Selkis noted that the IRS is treating crypto staking like stock dividends.
What PoS blockchains do at scale is embed state-level taxes into their protocols.
“The IRS says PoS rewards should be included in gross income, which means crypto has taken the concept of a “stock dividend” and made it taxable.
You get taxed for slicing a pizza in 10 vs. 8.”
Additionally, Jason Schwartz tax partner and digital assets co-head at Fried Frank expressed disappointment with the ruling, citing the usual requirement for a payer for taxable income to accrue to someone.
The IRS tax bulletin comes as U.S. federal regulators, including the Securities and Exchange Commission, target crypto-staking service providers and exchanges, alleging illegal securities sales.