The timing of the IRS’s ruling coincides with increased scrutiny from federal regulators towards crypto-staking services offered by exchanges.
The Internal Revenue Service (IRS) has ruled that crypto investors in the United States must count staking rewards as income in the year they gain control of the tokens. According to the legal analysis issued in Revenue Ruling 2023-14 on July 31, the fair market value of validation rewards should be considered as part of the taxpayer’s gross income, calculated when the taxpayer takes control of the tokens.
Until now, the IRS had not explicitly addressed staking rewards, leaving investors uncertain about their tax liabilities. However, with the issuance of the new guidance, the tax authority aims to clarify to investors the treatment of income earned from staking digital assets.
IRS New Ruling Applies to Both PoS Blockchains and Exchanges
The ruling applies to individuals staking on Proof-of-Stake (PoS) blockchains. It also extends to those who participate in staking through centralized crypto exchanges, receiving additional units of digital assets as rewards from their earnings programs.
According to the IRS, the fair market value of these rewards will be calculated when the taxpayer gains “dominion and control” over them. In other words, staking rewards that are accrued but locked will not be taxable until the recipient gains control over them.
For clarity, dominion refers to the time when an investor unstakes their crypto rewards and gains the ability to sell, exchange, or dispose of the tokens received during the staking period.
The tax authorities have also provided clarity on crypto mining, subjecting mining rewards to income and capital gains tax.
In the US, investors may face a tax rate of up to 37% on short-term capital gains and crypto income, while long-term capital gains are subject to a tax rate ranging from 0% to 20%.
Authorities introduced taxation on cryptocurrencies in 2021 ahead of the 2022 tax filings when the IRS began using “digital assets” in income tax reporting, replacing the previously used term “virtual currencies”.
US Authorities Crack Down on Crypto Staking
Meanwhile, the timing of the IRS’s ruling coincides with increased scrutiny from federal regulators, notably the US Securities and Exchange Commission (SEC), towards crypto-staking services offered by exchanges.
Earlier this year, the securities watchdog sued Kraken for breaching US laws. The SEC claimed that the company illegally offered staking programs to residents in the United States. However, Kraken agreed to settle the case for $30 million without denying or confirming the SEC’s allegations.
Before then, the financial regulator had also sued two other crypto exchanges, Gemini and Genesis, for offering unregistered staking products to customers in the US. The lawsuit was brought against the two companies in January, alleging that Genesis and Gemini raised billions of dollars worth of crypto assets from hundreds of thousands of investors without authorization from the government.
In response to increased regulatory pressure, some exchanges have suspended or modified their staking platforms to avoid potential violations of securities laws.