The Internal Revenue Service (IRS) has ruled that U.S. cryptocurrency investors must include staking rewards in their gross income since crypto assets are treated as property for federal income tax purposes.
According to an official document, taxpayers must include the fair market value of their staking rewards in their gross income as soon as they gain control of the crypto assets.
IRS Declares Crypto Staking Rewards Taxable
In the Proof-of-Stake consensus mechanism, crypto staking refers to the pledging of cryptocurrencies toward validating transactions on the blockchain and getting rewards.
As per the IRS, since general tax principles applied to property transactions are applicable to crypto transactions, rewards gained from validation activities must be recorded as gross income alongside rent, royalties, and compensation for goods and services.
The agency explained that the fair market value of staking rewards is determined on the date and time the crypto investor gains control of the assets. The same applies to investors who receive rewards by staking their assets through crypto exchanges.
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Likewise, taxpayers who receive cryptocurrencies as payment for goods and services, including crypto miners, must include the fair market value of their assets in their gross income for the taxable year.
“If a cash-method taxpayer stakes cryptocurrency native to a proof-of-stake blockchain and receives additional units of cryptocurrency as rewards when validation occurs, the fair market value of the validation rewards received is included in the taxpayer’s gross income in the taxable year in which the taxpayer gains dominion and control over the validation rewards,” the IRS stated.
Staking Issues in the U.S.
The latest update comes as authorities in the U.S. crackdown on crypto staking activities, a move that has led some exchanges to shut down their staking offerings.
The U.S. Securities and Exchange Commission (SEC), in particular, has tackled crypto staking activities since the beginning of this year. In February, the Commission charged crypto exchange Kraken with offering its staking services as unregistered securities. The firm later agreed to terminate the service and pay $30 million in disgorgement and civil penalties.
It is worth mentioning that a U.S. judge ordered Kraken to submit sensitive user information to the IRS in June so the agency could determine if crypto investors were cheating on their tax reports.
Meanwhile, the SEC has also gone after Coinbase with a lawsuit alleging, among other things, that its staking-as-a-service product is an unregistered security offering. The case is still in court.
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