How to Report Your Staking Crypto Taxes

Cryptocurrency staking involves locking up digital assets to help secure and validate transactions on a blockchain network, for which participants receive rewards. In the United States, the Internal Revenue Service (IRS) views these rewards as income with direct tax consequences. The tax obligation begins the moment you earn a reward, not when you sell the asset. Failing to report staking income can lead to underpayment of taxes and potential penalties, so participants must understand how the IRS treats these earnings.

Taxation of Staking Rewards

The IRS treats digital assets as property, a classification from Notice 2014-21 that dictates how transactions are taxed. When you receive staking rewards, you are receiving property, and this receipt is a taxable event. Income is recognized the moment you gain control over the assets, meaning you can sell, trade, or transfer them.

Staking rewards are taxed as ordinary income, subject to your regular income tax bracket. The value of the rewards is added to your other income sources, like wages, to determine your total taxable income. This tax treatment is confirmed in IRS guidance such as Revenue Ruling 2023-14.

The taxable event occurs upon receipt, even if you do not convert the rewards to U.S. dollars. If rewards are deposited into your wallet daily, each deposit is a separate taxable event. A capital gain or loss is a separate taxable event that only occurs when you later dispose of the rewarded assets.

Establishing the Cost Basis of Rewards

To calculate your taxable income, you must determine the Fair Market Value (FMV) of the cryptocurrency at the time you received it. The FMV is the price an asset would sell for on the open market, which can be found using a reputable crypto exchange or price-tracking service. You should use a consistent data source for all calculations.

The FMV of the rewards in U.S. dollars is the amount you report as ordinary income. This figure also establishes the cost basis for the newly acquired coins. For staking rewards, the cost basis is the income amount you reported upon receipt.

For example, if you receive 0.1 ETH as a reward when one ETH is worth $3,500, you have $350 of ordinary income to report. You now hold 0.1 ETH with a cost basis of $350. Because prices fluctuate, rewards received on different days will have different FMVs and cost bases.

Tax Implications of Selling Staked Assets

A second taxable event occurs when you dispose of the crypto you received from staking. A disposition includes selling the asset for cash, exchanging it for another cryptocurrency, or using it to buy goods or services. This transaction results in a reportable capital gain or loss.

The capital gain or loss is calculated by subtracting your cost basis from the sale price. If the sale proceeds are greater than your cost basis, you have a capital gain. If the proceeds are less, you have a capital loss.

The tax rate depends on your holding period, which begins on the date you received the reward. If you hold the asset for one year or less, the profit is a short-term capital gain taxed at ordinary income rates. Holding it for more than one year results in a long-term capital gain, which is taxed at lower rates.

Using the previous example, if you sell the 0.1 ETH with a cost basis of $350 eight months later for $400, you have a $50 short-term capital gain. If you sold it for $300, you would have a $50 short-term capital loss.

Information Needed for Tax Reporting

Accurate tax reporting requires detailed record-keeping. For each staking reward received, you must document:

• The date and time you received the reward
• The type and amount of cryptocurrency received
• The Fair Market Value (FMV) of the reward in U.S. dollars at the moment of receipt

For each sale or disposition of crypto earned from staking, you must also document:

• The date of the sale or disposition
• The gross proceeds received from the transaction in U.S. dollars

While manual tracking with a spreadsheet is possible, many taxpayers use specialized crypto tax software to automate data aggregation and calculations.

Reporting Staking Income to the IRS

After calculating your income and gains, you must report them on the correct tax forms. The two types of income from staking are reported in different places on your tax return.

Your total ordinary income from staking rewards is reported on Schedule 1 of Form 1040, “Additional Income and Adjustments to Income.” You should list this on the line for “Other income” with a description like “Cryptocurrency Staking Rewards.”

Capital gains or losses from selling staked assets are reported on Form 8949, “Sales and Other Dispositions of Capital Assets.” This form requires details for each sale, including acquisition and sale dates, proceeds, and cost basis. The totals from Form 8949 are then carried over to Schedule D, “Capital Gains and Losses.”