IRS Holds That Crypto Staking Rewards Are Taxable Income – Fin Tech

The Internal Revenue Service (“IRS”) recently issued
guidance in Revenue Ruling 2023-14, holding that taxpayers
who stake their cryptocurrency and receive additional units of
cryptocurrency as rewards when validation occurs must include the
fair market value of the validation rewards received as gross
income.

This long-anticipated ruling addresses an issue that was
recently before a federal appeals court in Jarrett v. U.S. In Jarrett, the taxpayers
sought a refund on crypto staking rewards that they had previously
included as income on their 2019 tax return under the theory that
staking rewards are newly-created property and are only taxable
when disposed of, not when received.

Jarrett has not been argued on the merits because the IRS
granted the taxpayers a refund and the case was dismissed by a U.S. district court as moot
since there was no longer any controversy for the court to resolve
regarding the taxpayers’ liability for 2019. The taxpayers
appealed to the Sixth Circuit, arguing that the IRS cannot
unilaterally end their case by sending them a refund check. On
Friday, the Sixth Circuit agreed with the district court that the
lawsuit became moot after the IRS issued the refund. Many were
hoping that the case would offer legal clarity to the millions of
crypto users who generate cryptocurrency rewards through
“proof-of-stake” blockchains.

Crypto staking is the process of pledging cryptocurrency
holdings to assist in the validation of transactions on a crypto
blockchain. This “proof-of-stake” consensus mechanism of
validation requires validators to hold and stake cryptocurrency in
exchange for transaction fees or “rewards” in the form of
additional cryptocurrency. The cryptocurrency staked may be locked
up and cannot be transferred or otherwise used by the validator for
a period of time, and is subject to “slashing” if a
validation is unsuccessful.

In the revenue ruling, the IRS cites case law providing that an
accession to wealth over which a taxpayer has complete dominion and
control constitutes income. Therefore, the IRS rules that staking
rewards are taxed once a taxpayer gains dominion and control over a
crypto token, which is when the taxpayer is able to sell, exchange
or dispose of the cryptocurrency reward it receives.

The IRS’s ruling echoes the eagerness of Congress and the
White House to resolve many unanswered crypto tax issues.

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