The highest tax authority in the United States has just ruled that cryptocurrency holders who earn staking rewards must declare them as gross income in the year they are received.
Revenue Ruling 2023-14, which provides clarification on how income derived from staking digital assets should be considered for taxable purposes, was released by the Internal Revenue Service (IRS) on July 31.
Gross income comprises all forms of revenue, including money, property, services, and now staking rewards.
The judgement applies to cash-method taxpayers who receive any cryptocurrency as payment for validating transactions on proof-of-stake blockchains, and it applies when staking cryptocurrencies directly or through a centralized crypto exchange.
According to the judgement, the fair market value of the cryptocurrency incentives should be included in annual income and determined when the assets are acquired.
The taxpayer acquires dominion and authority over the validation rewards at the time the fair market value is assessed.
Dominion was described as the period of time during which the investor had authority over the cryptocurrency rewards and the power to sell, exchange, or otherwise dispose of them.
According to cryptocurrency tax firm Koinly, the IRS previously taxed capital gains and income from cryptocurrency mining awards, but did not yet have any rules for staking incentives.
According to Ryan Selkis, the founder of Messari, the IRS treats cryptocurrency staking like stock dividends.
The verdict is therefore not surprising, but it is nevertheless aggravating, according to Jason Schwartz, tax partner and co-head of digital assets at Fried Frank.
For taxable income to accrue to someone, according to tax law, there must always be a payer, such as an employer or other counterparty. Even finding hidden treasures is a form of deferred payment.
The IRS tax bulletin is released at a time when U.S. government officials, including the Securities and Exchange Commission, are focusing on exchanges and providers of crypto-staking services because they are allegedly offering illicit securities transactions.
