Analysis: IRS Confirms Staking Rewards Are Income
This article was written by Jason Schwartz
The IRS issued Revenue Ruling 2023-14 confirming its view that consensus-layer staking rewards are taxed at fair market value when the staker has dominion and control over them (i.e., the ability to sell them).
Under Notice 2014-21, mining rewards are subject to tax at ordinary rates when received. Based on the notice, most tax advisors have assumed consensus-layer staking rewards are similarly taxed. This ruling confirms that assumption.
While the ruling is therefore unsurprising, it’s still disappointing. Tax law has always required the existence of a payer, such as an employer or other counterparty, for taxable income to accrue to someone. Even treasure trove discoveries are deferred payments. By contrast, when taxpayers extract minerals, harvest crops, breed livestock, produce art or goods, or otherwise exercise dominion and control over property for which no previous owner exists, they aren't taxed until they sell the property.
If newly minted tokens are more like newly extracted minerals than service payments or found treasure trove, they shouldn’t be taxed until sold. Blockchains are not tax "persons," so they're not payers. (By contrast, priority transaction fees and maximal extractable value rewards are pretty clearly income.)
In Jarrett v. United States, a staker sued the IRS for a refund of tax he paid on newly minted XTZ rewards. The IRS first contested the refund, then granted it and successfully sued to dismiss the case as moot. Some tax experts hoped this meant the IRS was rethinking its staking stance.
This ruling kills that hope. It also raises several serious questions:
- Slashing. If staking rewards are ordinary income, are slashing penalties ordinary losses?
- Income tax on foreigners. Foreigners are subject to U.S. net income tax, and have to file U.S. tax returns, if they are in a "U.S. trade or business" ("USTB"). Does delegating to a U.S. node create a USTB for a foreigner?
- Withholding on foreigners. Foreigners that are NOT in a USTB are nevertheless subject to a 30% U.S. withholding tax on income from services performed in the U.S. Does delegating to a U.S. node result in withholding for a foreigner?
- Liquid staking. Most taxpayers take the view that U.S. tax law doesn't "look through" nonrebasing liquid staking tokens ("LSTs") like rETH and wstETH. If they're right, U.S. taxpayers who buy LSTs can turn current ordinary income into deferred capital gains. Is that the right policy result?
While revenue rulings are binding only on the IRS (not on taxpayers), they tend to be viewed as persuasive. Thus, U.S. home stakers would be well-advised to pay taxes on their rewards unless they're ready to go to court.
That said, there might be some hope in the future. The Lummis-Gillibrand crypto bill would not tax mining or staking rewards until sale. Wyden and Crapo's recent request for comments on the taxation of digital assets suggests that they are amenable to a similar approach.