Is Staking Crypto Taxable? How to Report Staking Income

Cryptocurrency staking allows crypto holders to participate in network security and earn rewards by locking digital assets to support blockchain operations. In return, participants receive additional cryptocurrency. For individuals in the United States, these staking rewards are considered taxable income. The Internal Revenue Service (IRS) views these digital assets, including those earned from staking, as property for tax purposes, triggering tax obligations that must be reported on annual tax returns. This article explains how staking rewards are taxed and reported.

Taxation of Staking Rewards

Staking rewards are considered taxable income at the moment a taxpayer receives them or gains “dominion and control” over the assets. This means the rewards are taxable even if they are not immediately converted to traditional currency like U.S. dollars. The IRS clarified this stance in Revenue Ruling 2023-14, stating that staking rewards are included in gross income when the taxpayer can freely move, spend, or trade the coins.

These rewards are taxed as ordinary income, similar to how interest earned from a savings account or dividends from stocks would be treated. The taxable amount is the fair market value (FMV) of the cryptocurrency at the date and time of receipt. Determining this FMV often involves using reputable exchange rates from the specific platform or a pricing index at the moment the rewards become accessible.

Once taxed as ordinary income upon receipt, these staking rewards acquire a new cost basis. This cost basis is equal to their fair market value at the time they were received. This established cost basis is important for calculating any future capital gains or losses when these digital assets are later sold, exchanged, or otherwise disposed of. For instance, if the value of the received reward increases after its initial receipt and subsequent taxation as income, a capital gain would be realized upon sale.

Accounting for Staking Activities

Accurately tracking staking activities is important for tax compliance, requiring thorough record-keeping. Taxpayers should record data points for each staking reward received. This includes the date and time of receipt, the quantity of the cryptocurrency received, and the type of cryptocurrency.

It is also important to document the fair market value of the crypto at the time of receipt, along with the source of that valuation, such as a particular exchange or pricing index. Identifying the source of the reward, like the blockchain network or staking platform, helps in maintaining comprehensive records. Maintaining these detailed records allows for accurate calculation of income and cost basis.

Practical methods for tracking this information include using spreadsheets, which offer a customizable way to organize data. Alternatively, dedicated cryptocurrency tax software can automate much of this process by integrating with various staking platforms and exchanges. These software solutions can import transaction histories and help determine fair market values, streamlining the preparation for tax reporting. Consistent and thorough record-keeping minimizes potential errors and simplifies tax filing.

Reporting Staking Income and Dispositions

After gathering and calculating all necessary information, reporting staking income involves specific tax forms. Staking rewards, treated as ordinary income, are reported on Schedule 1 (Form 1040), on Line 8z, designated for “Other income.” The total fair market value of all staking rewards received throughout the tax year is aggregated and reported on this line.

The sale or exchange of either the original staked cryptocurrency or the received staking rewards requires separate reporting. These transactions are reported on Form 8949, “Sales and Other Dispositions of Capital Assets.” This form details each individual transaction, including the acquisition date, sale date, proceeds from the sale, and the cost basis of the asset. The information from Form 8949 is then summarized on Schedule D, “Capital Gains and Losses,” which calculates the overall capital gains or losses for the tax year.

The gain or loss on these dispositions is calculated by subtracting the cost basis from the sale price. For staking rewards, the cost basis is the fair market value reported as income at the time of receipt. While crypto tax software can assist in generating these forms by compiling transaction data, understanding which forms are used and what information is required ensures accurate compliance.

Understanding Specific Staking Scenarios

Staking activities encompass various methods, each with tax considerations. When staking rewards are re-staked, they are still considered received income at their fair market value at the time of receipt. This value establishes their cost basis for future capital gains calculations when those re-staked assets are disposed of. The act of re-staking does not defer the income tax liability.

Whether an individual participates in delegated staking or runs a full validator node, the tax treatment of the rewards adheres to the same principles. The receipt of rewards, regardless of the underlying technical mechanism, is a taxable event based on the fair market value at the time of control. The method of contributing to the network does not alter the income recognition rule.

Liquid staking introduces nuances with the issuance of liquid staking tokens (LSTs). The receipt of an LST in exchange for staked crypto may or may not be considered a taxable event, depending on whether it is viewed as a “swap” of assets or merely a “receipt” representing the original staked asset. However, any rewards generated by holding the LST are taxed upon receipt, similar to other staking rewards. The subsequent sale or exchange of the LST itself would then trigger capital gains or losses, using the established cost basis.