How Staking Rewards Are Taxed Under a Proof of Stake System

Due to the dynamic and evolving nature of the digital asset industry, the taxation of staking rewards, where a validator secures the network and earns cryptocurrency tokens, remains a developing area. For most cash basis taxpayers, IRS specific guidance is available. For accrual basis taxpayers, however, direct guidance is lacking. The first part of this article analyzes both the available guidance on the taxation of staking rewards, and where guidance is not available, the relevant US Internal Revenue Code provisions that may apply (i.e., what event triggers rewards taxability, how the taxable amount should be calculated). The framework developed here is intended to assist tax professionals in establishing informed positions when navigating the complex scenarios involving staking rewards that specifically use Proof of Stake (PoS) mechanisms. The second part of this article analyzes each stage of a validator’s lifecycle within the Ethereum PoS network to identify the point when a taxable event occurs.

Overview of Staking Rewards

In blockchain technology, securing the network is a key aspect in preventing attackers from tampering with the data stored on the blockchain. It is equally important to establish a reliable mechanism for adding and validating new blocks, ensuring the chain continues to grow accurately and securely. A basic principle of blockchain design is decentralized security, which is implemented through consensus mechanisms like Proof of Work (PoW) or PoS.

PoS Protocol Structure
In PoS mechanisms, participants, referred to as validators, lock a certain amount of native tokens as collateral. In return, they gain the right to propose and attest new blocks within the particular network. For performing these services, a validator earns staking rewards. The calculation of staking rewards is influenced by multiple factors, including the network’s staking ratio, a validator’s downtime and performance, and the potential risk of slashing due to protocol violations. How are staking rewards calculated?, WalletInvestor Magazine (Jan. 26, 2022).

Each blockchain network implements its own PoS protocol, which governs processes such as validator selection, reward distribution, bonding and unbonding of stake, and penalties for protocol violations. To assess the appropriate timing for revenue recognition and the overall accounting or tax implications of staking rewards, one reliable approach is to examine the rules defined in the network’s protocol specifications. These specifications are often maintained publicly on platforms like GitHub or a project’s official documentation site, and they outline how validators interact with the network.

Legal Framework for Taxation of Staking Rewards

To determine the tax treatment for any specific evolving area, the analysis may begin with a few basic questions:

1. Whether the item constitutes income;

2. What event triggers its taxability; and

3. How should the taxable amount be calculated?

In the context of staking rewards, specific guidance exists for cash basis taxpayers that address all three questions. For accrual basis taxpayers, no direct guidance is currently available. Therefore, it is important to identify and analyze the existing relevant principles of tax law to draw the probable conclusion regarding the tax treatment of staking rewards. This section systematically analyzes these basic questions in the context of staking rewards, beginning with the IRS’s specific guidance and then turning to existing tax provisions where such guidance is unavailable.

Staking Rewards Is Income

IRC §61(a) establishes the general rule that gross income includes all income from whatever source derived, unless specifically excluded by law. It further clarifies that income may be realized in any form, whether in money, property, or services. Therefore, income may arise not only from cash receipts but also from services, meals, accommodations, stock, or other forms of property, including staking rewards. There is one set of arguments suggesting that staking rewards are self-created property, and under US law, the creation of property is generally not considered a taxable event. On the other hand, another view, aligning with the IRS current position, considers staking rewards as compensation earned for the performance of services, taxable when received or created. Either way, staking rewards are typically treated as income, whether at the time of creation or at the time of disposal. Therefore, the more important question becomes which event actually triggers taxability.

What Is the Taxable Event?

Since the objective is to determine when income from staking activities becomes taxable, two aspects must be considered. First, we must consider the validator’s lifecycle within the framework of the network’s consensus protocol, which influences when rewards are distributed to validator (discussed later). Second, the category of a taxpayer’ whether cash basis taxpayers or accrual basis taxpayers. Accrual basis taxpayers are further classified into two subcategories: those with an AFS and those without. This categorization is essential, as it governs both the timing of income inclusion and the method used to calculate the amount of staking rewards to be reported as revenue.

1. Cash Basis Taxpayers
For cash basis taxpayers, income is generally recognized when dominion and control is established, usually when the rewards are received in the wallet. However, this issue is being currently litigated (discussed below). And legislation has been introduced to change this treatment, but it is uncertain if Congress will pass the bill. H.R. 8149, 118th Cong. (Apr. 29, 2024).

a. Rev. Rul. 2023-14 Guidance
Rev. Rul. 2023-14 provides that if a cash method taxpayer stakes cryptocurrency native to a proof-of-stake blockchain and receives additional units of cryptocurrency as validation rewards, the fair market value of the rewards must be included in the taxpayer’s gross income in the taxable year in which the taxpayer gains dominion and control, which is at the time of creation.

The revenue ruling reiterates the broad definition of gross income under IRC §61 and further relies on the US Supreme Court’s decision in Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 431 (1955), where the Court held that “instances of undeniable accessions to wealth, clearly realized, and over which the taxpayers have complete dominion” must be included in gross income. Drawing an analogy from this principle, the ruling concludes that staking rewards are taxable at creation when the taxpayer establishes dominion and control over them.

It is important to note that the Glenshaw Glass case, which forms the legal basis for the ruling’s interpretation, dealt with whether money received as exemplary damages for fraud or punitive damages must be reported as gross income and did not consider taxation. The Court held that such receipts fall within the expansive scope of gross income under IRC §61(a).

Note that Rev. Rul. 2023-14 does not apply to accrual basis taxpayers.

b. Jarrett v. United States Litigation
The fundamental question regarding what triggers a taxable event when staking rewards has been challenged through litigation.

Prior to the issuance of Rev. Rul. 2023-14, Joshua Jarrett, timely filed his 2019 taxes and claimed his staking rewards as taxable on his Schedule C, Profit or Loss From Business. Later in 2020, he filed an amended return requesting a refund on the taxes paid related to the staking rewards. After the IRS did not respond, he filed a refund suit contesting under general tax principles his 2019 tax liability for the taxation of staking rewards upon their creation. The taxpayer argued that staking rewards should not be treated as gross income when the taxpayer created the cryptocurrency because staking does not represent a clearly realized accession to wealth. Instead, the taxpayer asserted that taxation should occur only upon a subsequent sale or disposition of the rewards. The case was dismissed as moot, however, because the IRS voluntarily issued a refund during the litigation, thereby depriving him of the opportunity for judicial review. Jarrett argued that even if his refund claim was moot, he was entitled to obtain prospective relief regarding the issue of whether the creation of cryptocurrency tokens would trigger a taxable event in future tax years, but the court disagreed). See Jarrett v. Commissioner, Docket No. 3:21-cv-00419 (M.D. Tenn. 2022); Jarrett v. United States, Docket No. 22-6023, 79 F.4th 675 (6th Cir. 2023).

Because the IRS did not address whether it would treat the creation of crypocurrency rewards the same in future years, Jarrett filed another suit on the same issue for the 2020 tax year, culminating in this most recent refund suit. Jarrett v. United States, Docket No. 3:24-cv-01209 (M.D. Tenn. (Oct. 10, 2024). He paid tax on his newly created tokens in 2020 and went through the administrative refund process before he brought this refund suit to request judicial resolution on the issue. Jarrett v. United States, Compl. ¶78, Docket No. 3:24-cv-01209 (M.D. Tenn. Oct. 10, 2024).

Relying on various judicial judgments, the current complaint systematically analyzes and interprets key terms such as “income,” “derived,” and “realized” as used in IRC §61(a). The complaint proffers that staking rewards are not included in gross income until they are sold, for the following three reasons:

1. For an item to constitute taxable “income,” it must “come in,” meaning it must be received from another party. Newly created staking rewards, having not been received from anyone, do not “come in” and therefore do not constitute gross income. Compl. ¶75.

2. Taxable income must be “derived” from a “source.” The term “derive” means “to receive, as from a source or origin,” or “to draw.” For income to be “derived,” it must be received from another party through a sale or other transaction. Staking rewards, however, are not derived from a source; they are created by the taxpayer himself. Accordingly, staking rewards do not constitute taxable income. Complaint, Compl., ¶76.

3. For an item to constitute taxable “income,” it must also be “clearly realized.” A fundamental aspect of realization is the conversion of property into money. Taxable income generally refers to proceeds realized “from the sale or other disposition of property.” Therefore, the mere creation of staking rewards as new property does not involve a conversion into money and thus does not constitute realization. It is only upon the subsequent sale or other disposition of that property that realization occurs. Compl., ¶77.

Additionally, the complaint draws an analogy between staking rewards and vegetables grown by farmers. Jarrett argues that if a farmer plants vegetables, he does not pay income tax on the value of each vegetable as it sprouts. Instead, tax is owed on the payments he receives from buyers when he sells them. Until the sale, he has a gain in the form of new property, but he does not have taxable income. Compl. ¶80.

c. Practical Approach
Cash basis taxpayers should evaluate their tax position on staking rewards based on their specific facts and circumstances. Until judicial opinions are issued in the pending lawsuit, a conservative approach would be to recognize and pay tax on staking rewards in accordance with Rev. Rul. 2023-14.

Based on network protocols, dominion and control is generally established when the taxpayer has full control over the rewards and the ability to sell them. This typically occurs when the rewards are received in the validator’s wallet from the network. Accordingly, the rewards would be valued at their fair market value (FMV) at the time of receipt.

Notably, Jarrett, who reported and paid tax on the staking rewards before seeking a refund, adopted a conservative approach that will help mitigate potential costs if the judicial outcome is unfavorable to him. In contrast, an aggressive position would involve deferring taxation until the staking rewards are actually sold.

2. Accrual Basis Taxpayers
Under US tax principles, the taxable event for an accrual basis taxpayer must occur either before or at the same time as it does for a cash basis taxpayer. It cannot occur later. Since cash basis taxpayers are generally taxed when staking rewards are received in their wallet, a critical question arises: Could accrual basis taxpayers be required to recognize staking rewards income even before the rewards hit their wallet?

If such a possibility exists, it could generate significant controversy within the US blockchain ecosystem, particularly among those aligned with the taxpayer position advanced in the Jarrett litigation

To fully analyze this, it becomes necessary to evaluate the validator’s life cycle under a typical PoS protocol, in conjunction with IRC §451. While the structure of EthereumPoS protocols is addressed in the later part of this article, the analysis begins with the most relevant tax provision to determine the event triggering the staking rewards taxability.

a. §451 Guidance
Section 451 provides that any item of gross income must be included in a taxpayer’s income for the year it is received, unless the taxpayer uses the accrual method of accounting. For accrual basis taxpayers, the timing of income inclusion is governed by the “all events test.” Additionally, if the taxpayer maintains an applicable financial statement (AFS), IRC §451(b) imposes a limitation: income must be recognized for tax purposes no later than the year in which it is recognized in the AFS.

This provision effectively categorizes accrual basis taxpayers into two groups:

1. Those without an AFS must report income based on applying the “all events test” under IRC §451.

2. Those with an AFS must report income for tax purposes in the same year the income is recognized in the AFS, and would follow the “performance obligation test” under ASC 606.

Although §451 divides accrual basis taxpayers into two groups based on the presence or absence of an AFS, in practice, the point of revenue recognition may be identical for both groups. Whether applying the “all event test” or “performance obligation test” under ASC 606, income inclusion typically occurs when the network confirms that a block has been validated and the rewards become fixed and transferable. Therefore, it is entirely possible and perhaps even likely that accrual basis taxpayers could be required to pay tax on staking rewards before the rewards actually hit their wallet.

b. Accrual Basis Taxpayers Without an AFS
For taxpayers without an AFS, the “all events test” is considered satisfied when:

1. All events have occurred that fix the right to receive the income; and

2. The amount of the income can be determined with reasonable accuracy.

In the context of staking rewards, these criteria must be evaluated in light of the functioning of the PoS protocol. It is possible that the right to receive income becomes fixed, and its value can be reasonably determined, even before the validator gains dominion and control that is typically before the rewards are received in the wallet. Although this interpretation may be viewed as conservative, in the absence of specific IRS guidance, it may represent the most prudent approach to mitigate the risk of penalties and interest in the event of a dispute.

c. Accrual Basis Taxpayers With an AFS
Taxpayers with an AFS are generally required to recognize for tax purposes the same income reported in those statements. These financial statements are typically prepared in accordance with either US GAAP (issued by the Financial Accounting Standards Board (FASB)) or IFRS (International Financial Reporting Standards). These frameworks guide taxpayers on how and when to recognize revenue. However, they do not currently provide specific guidance for staking-related transactions.

The most relevant guidance on when to recognize revenue under US GAAP is:

1. ASC 606, Revenue from Contract with Customers; and

2. FASB Concepts Statement No. 8 (FASB CON-8).

In 2023, although the FASB issued Accounting Standards Update 2023-08, which offers presentation and disclosure guidance for certain digital assets, this framework does not currently provide specific guidance on the treatment of staking rewards.

ASC 606: Taxpayers need to first analyze the applicability of ASC 606, which depends heavily on the facts and circumstances of each staking arrangement, and can vary by blockchain due to differences in how rewards are calculated, when they are distributed, and whether bonding, unbonding, or cooldown periods apply. KPMG, Hot Topic: Digital assets - Accounting for crypto staking activities (Dec. 2024).

Where ASC 606 is considered to be applicable, the taxpayers are required to recognize income when the performance obligation is fulfilled. In the context of staking rewards, the validation of blockchain transactions may be treated as an output of the validator’s ordinary activities. Each successfully validated block may represent a distinct performance obligation. That obligation is considered satisfied at the point when the network confirms the block and the associated reward becomes available for transfer. See Form 10-K BTCS Inc.. At that point, the fair value of the noncash consideration is measured at contract inception and recognized as revenue. ASC 606.

FASB CON-8: If ASC 606 is deemed inapplicable, revenue treatment may instead be guided by the FASB CON-8. Under this framework, any item that qualifies as a financial statement element and meets the recognition criteria of relevance and faithful representation should be recorded using accrual principles. In the context of staking rewards, revenue may be recognized when the validator completes its service (i.e., successful block validation) and the reward becomes measurable. However, because most public companies currently apply ASC 606, the primary focus remains on that framework for purposes of staking reward recognition. See Form 10-K BTCS Inc. & Stronghold Digital Mining, Inc..

How to Value Staking Rewards

1. Cash Basis Taxpayers
The method for calculating staking reward income is similar for cash basis taxpayers and accrual basis taxpayers without an AFS: valuation is based on the FMV at the date and time the rewards are considered received. Rev. Rul. 2023-14.

2. Accrual Basis Taxpayers Without an AFS
For accrual basis taxpayers without an AFS, the valuation of staking rewards may follow the approach outlined in Rev. Rul. 2023-14 for cash basis taxpayers. The ruling provides that, unless otherwise specified by statute or regulation, the receipt of property constitutes gross income in the amount of its fair market value at the date and time it is reduced to undisputed possession. Koons v. United States, 315 F.2d 542 (9th Cir. 1963); Rooney v. Commissioner, 88 T.C. 523, 526–527 (1987); Treas. Reg. §1.61-2(d)(1).

3. Accrual Basis Taxpayers With an AFS
For accrual basis taxpayers with an AFS, income calculation differs, as these taxpayers generally follow ASC 606. Under this standard, noncash consideration is measured at its fair value on the contract inception date. The determination of contract inception can vary based on the blockchain protocol and the nature of arrangement with validators. KPMG, Hot Topic: Digital assets. The revenue reported under accounting principles may differ from that reported for tax purposes because ASC 606 requires valuation at contract inception, while current IRS guidance does not address this point. As a result, these taxpayers may need to maintain separate accounting records for financial reporting and income tax purposes. Targeted IRS guidance on this issue would provide much needed clarity for the taxpayer community.

Staking Ethereum Rewards—Validator’s Lifecycle in Ethereum Network

We next consider the validator lifecycle in the Ethereum network, which accounts for a substantial share of global staking activity. The structure and operations of this lifecycle help evaluate the point at which performance obligation is fulfilled and income recognition may be triggered for tax purposes.

Following the Capella upgrade, introduced on April 12, 2023, Ethereum validators gained the ability to withdraw their staking rewards. Ethereum’s Shanghai Upgrade Is Complete, Starting New Era of Staking Withdrawals, Coin desk (Apr. 13, 2023). This was a significant shift in the operational mechanics of the network. To define the stages of the validator lifecycle, the “Prysm Validator Lifecycle Guide” was initially referenced; however, it reflects a pre-Capella structure. To ensure accuracy under the current protocol, the post-Capella specifications as published on Ethereum’s official GitHub repository have been incorporated. Based on this synthesis, the updated stages of the Ethereum validator lifecycle can be outlined as follows:

1. Deposited: The validator deposits 32 ETH into the Ethereum deposit contract on the execution layer, and this information is then relayed to the Consensus layer. This deposit is a prerequisite for validator activation.

2. Pending Activation: After the deposit is successfully processed, the validator enters an activation queue, where the wait time depends on network churn limits and the number of validators already awaiting entry. The validator does not perform any duties during this stage.

3. Active: Once activated, the validator begins participating in consensus duties, including attesting to blocks, proposing new blocks, and contributing to sync committees. These activities are measured during each epoch (approximately every 6.4 minutes). At the end of each epoch, the protocol evaluates the validator’s performance and applies rewards or penalties accordingly. The updated balance is reflected on the consensus layer, but staking rewards remain locked unless they exceed the 32 ETH thresholds and a valid withdrawal credential has been set.

4. Partially Withdrawable: While still in the active set, if the validator’s balance exceeds 32 ETH and a valid execution-layer (ETH1) withdrawal address has been configured, the excess balance becomes eligible for automatic partial withdrawal. The Ethereum protocol’s “process_withdrawals” function selects up to 16 validators per epoch to sweep excess rewards to the execution layer.

5. Initiated Exit: The validator voluntarily initiates an exit or is forcibly exited (e.g., due to slashing). Upon initiation, an exit epoch is scheduled, after which the validator ceases performing consensus duties.

6. Withdrawable (Exited): After a mandatory 256-epoch delay (27 hours) from the exit epoch, the validator becomes fully withdrawable. At this stage, the validator’s entire balance, including the initial 32 ETH stake and any remaining rewards become eligible for full withdrawal, subject to availability in the process withdrawals queue.

7. Fully Withdrawn: Once the validator is selected by the “process withdrawals” mechanism, the entire balance is transferred from the consensus layer to the validator’s designated withdrawal address on the execution layer. At this point, the validator lifecycle is considered complete, and re-entry would require a new deposit and activation process.

Analysis of Taxable Event within the Ethereum PoS Protocol

The stages outlined above reflect the activities carried out by the network during a validator’s lifecycle. The objective is to identify the specific event that triggers the taxability of staking rewards; however, it is important to note that this event may differ for cash basis and accrual basis taxpayers.

1. Cash Basis Taxpayers Rewards Recognition
Cash basis taxpayers recognize income only when dominion and control over the funds is established. Within the Ethereum validator lifecycle, two stages may be relevant for this purpose:

Stage 4—Partially Withdrawable: When the validator remains active and the balance exceeds 32 ETH, any excess may be automatically transferred to the validator’s execution-layer wallet provided a valid withdrawal address is configured. This stage may be viewed as a potential point at which dominion and control is established, suggesting that income recognition could occur.

Stage 7—Fully Withdrawn: For validators who exit the network, full access to both the initial stake and accrued rewards is granted after the completion of the withdrawal delay. The transfer of funds to the wallet address in execution layer at this point may also be considered a moment where dominion and control is realised.

In both instances, the taxable event for cash basis taxpayers may be tied to the actual crediting of rewards to the wallet, corresponding to the point when the Ethereum protocol enables unrestricted access to those rewards.

2. Accrual Basis Taxpayers Rewards Recognition
Based on the discussion above, accrual basis taxpayers can be classified into two categories: those with an AFS and those without.

Taxpayers without an AFS follow the accrual test under IRC §451, which is considered satisfied when the staking rewards are fixed and can be determined with reasonable accuracy.

Taxpayers with an AFS generally apply ASC 606 and recognize revenue when the performance obligation is fulfilled. Notably, public companies engaged in staking activities typically recognize revenue at the point in time when the network confirms that a block has been validated and the associated rewards become available for transfer.

Accrual basis taxpayers in both categories may consider Stage 3 “Active” as the appropriate point for revenue recognition. In the validator lifecycle, Stage 3 “Active” is the point at which a validator becomes eligible to participate in attesting and proposing blocks. At the end of each epoch, rewards are applied based on performance. This may represent the point at which the network confirms validation and rewards become fixed.

Thus, Ethereum’s validator lifecycle provides for any validator’s life cycle to be analyzed for aligning staking-related events with applicable income recognition standards. By mapping technical protocol behavior to statutory tax principles, practitioners can better assess reporting obligations and mitigate compliance risks.

Going Forward

Above all, it is essential to analyze the PoS protocol of each network, as the tax treatment of staking rewards depends heavily on the specific facts and circumstances of each case. Therefore, professionals handling such matters must carefully consider all relevant factors before determining the appropriate tax position for staking rewards.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Keval Sonecha is a partner at Sonecha & Amlani in India.

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