🤔 IRS: Rewards generated from cryptocurrency staking should be taxed at market value
The IRS recently clarified that rewards generated from cryptocurrency staking need to be taxed once received. This means that every token earned through staking counts as income and must be taxed at market value.
Imagine that when you lock your cryptocurrency in a network to assist in its normal operation, you subsequently receive some staking rewards. The IRS believes that these rewards do not represent a new category of property and therefore cannot wait until they are sold or exchanged to pay taxes.
This position is related to a legal dispute involving a couple, Joshua and Jessica Jarrett. They staked on the Tezos network and argued that their staking rewards should not be taxed until they are sold or exchanged, similar to a farmer's crops or a writer's books. However, the IRS holds the opposite view, asserting that once these staking rewards are received, they constitute taxable income and must be taxed.
If you are new to cryptocurrency staking, it essentially involves locking your currency in the blockchain network to help validate transactions, after which you can receive some returns. This is typically related to Proof of Stake (PoS), which allows you to earn some passive income through the staked assets you hold, similar to interest in a bank.
The IRS stated in its 2023 guidance that block rewards (including those obtained through staking) should be counted as income when they are generated. Therefore, when you earn token rewards, you need to track their value as this affects how much tax you will owe.
In 2021, the Jarretts sued the IRS over the taxation of the 8,876 XTZ tokens they received in 2019, but the court dismissed the case on the grounds that the IRS had already issued a refund. In 2024, they filed another lawsuit seeking a refund of additional taxes, which is currently under consideration.
Previously, an individual was sentenced to two years in prison for failing to report capital gains from cryptocurrency sales between 2017 and 2019.
💬 What do you think about the IRS's new stance on cryptocurrency staking? What do you believe this means for cryptocurrency investors?
