What Crypto Investors Should Know About Staking and Taxes

The IRS has made it clear that cryptocurrency staking rewards can be taxable income. In one Tax Court case, a taxpayer argued that the tokens he received from staking should not be taxed right away. However, because he was able to sell the tokens whenever he wanted and there were no major restrictions on them, the court decided that he had control over the tokens. This meant their fair market value counted as taxable income in the year he received them. The IRS also released guidance in 2023 explaining that staking rewards are generally considered gross income once the taxpayer has control over the cryptocurrency. In other words, you generally don't have to wait until you sell the rewards for them to potentially become taxable.

There is also a proposed change that could give taxpayers another option. A House bill would allow taxpayers to choose to delay reporting income from staking rewards until they actually sell or otherwise dispose of the tokens. If taxpayers don't make that election, the rewards would continue to be included in their income when they receive them. If you sell cryptocurrency through a broker, you may also receive a Form 1099-DA. Brokers use this form to report cryptocurrency sales and, in some situations, the tax basis of digital asset transactions. New proposed rules would make it easier for brokers to provide these forms electronically, with the changes applying to 1099-DAs sent in 2027. One important thing to keep in mind is that these reporting requirements don't currently apply to decentralized finance, or DeFi, exchanges. These platforms allow people to make transactions directly on a blockchain without using a traditional intermediary, so they generally don't issue Form 1099-DA.