IRS Issues Cryptocurrency Tax Ruling: Staking Rewards Now Taxable Income

Key Points:

• IRS taxes cryptocurrency staking rewards as income upon gaining control of tokens.
• The guidance applies to individual investors and staking services by exchanges.
• US agencies scrutinize staking platforms as possible securities, IRS urged for clear crypto tax guidelines.

The Internal Revenue Service (IRS) has issued a ruling stating that cryptocurrency investors who receive rewards for participating in validation activities on proof-of-stake (PoS) networks should count those rewards as income in the year they gain control of the tokens.

According to CoinDesk, this latest tax guidance clarifies the taxation of cryptocurrency staking rewards and applies not only to individual investors but also to those staking tokens through cryptocurrency exchanges.

The IRS emphasizes that the fair market value of the validation rewards must be included in the taxpayer’s gross income in the taxable year when they gain dominion and control over the rewards. The valuation should be based on the moment the U.S. taxpayer acquires control of the tokens. This means that the taxable event occurs when the investor can freely use, transfer, or sell the rewarded tokens.

Furthermore, the IRS asserts that the rule applies equally to investors who stake tokens through cryptocurrency exchanges if they receive additional units of cryptocurrency as rewards for their participation in validation. This clarifies the tax treatment for investors using staking services provided by exchanges.

The IRS’s legal guidance comes amid increased scrutiny from federal and state regulators on staking services offered by crypto exchanges. The U.S. Securities and Exchange Commission (SEC) has been particularly active in targeting staking platforms, considering them as potentially offering securities.

Notable cases include Kraken, which settled accusations from the SEC by shutting down its staking platform earlier this year, and the recent assertion by the agency that Binance’s staking service violates securities law.

In response to the rapidly growing crypto industry, U.S. House legislators have urged the IRS to expedite the release of comprehensive crypto tax guidelines to facilitate full compliance for businesses. An IRS official stated in April that the agency planned to develop a new operational strategy for handling cryptocurrencies within the next 12 months.

Outside the U.S., the IRS has collaborated with crypto investigations firm Chainalysis and Ukraine to pursue Russian billionaires who might be utilizing cryptocurrency to evade additional sanctions.

The IRS’s recent ruling aims to bring clarity to the taxation of cryptocurrency staking rewards, ensuring that investors are aware of their tax obligations when participating in proof-of-stake networks and staking services offered by exchanges. Cryptocurrency investors and stakeholders are advised to consult with tax professionals to ensure proper compliance with these tax regulations.

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