The IRS says taxpayers must include the fair market value of staking rewards in their gross income once they gain control of crypto assets.
The Internal Revenue Service (IRS) states that U.S. cryptocurrency investors must include staking rewards in their gross income because crypto assets are treated as property for federal income tax purposes.
According to an official document, taxpayers must include the fair market value of staking rewards in their gross income once they gain control of crypto assets.
IRS declares crypto staking rewards taxable
In the proof-of-stake consensus mechanism, cryptocurrency staking refers to staking cryptocurrency to verify transactions on the blockchain and obtain rewards.
According to the IRS, because the general tax principles that apply to property transactions also apply to cryptocurrency transactions, rewards earned from validation activities must be recorded as gross income along with rent, royalties, and compensation for goods and services.
The agency explained that the fair market value of staking rewards is determined based on the date and time when the cryptocurrency investor gains control of the asset. This also applies to investors who stake their assets through cryptocurrency exchanges to receive rewards.
Likewise, taxpayers who accept cryptocurrency as payment for goods and services, including cryptocurrency miners, must include the fair market value of their assets in their gross income for the taxable year.
“If a cash method taxpayer holds cryptocurrency native to a proof-of-stake blockchain and receives additional units of the cryptocurrency as a reward upon validation, the fair market value of the validation reward received will be included in the taxpayer’s gross income for the taxable year in which the taxpayer acquired disposition and control over the validation reward,” the IRS said.
The Pledge Problem in the United States
The latest update comes as U.S. authorities are cracking down on cryptocurrency staking activities, a move that has led some exchanges to shut down staking products.
In particular, the U.S. Securities and Exchange Commission (SEC) has been dealing with cryptocurrency staking activities since the beginning of this year. In February, the Commission charged cryptocurrency exchange Kraken with providing staking services in the form of unregistered securities. The company later agreed to terminate its services and pay $30 million in disgorgement and civil penalties.
It is worth mentioning that a US judge ordered Kraken in June to hand over sensitive user information to the IRS so that the agency could determine whether cryptocurrency investors were cheating on their tax reports.
Meanwhile, the SEC has also filed a lawsuit against Coinbase, alleging that its staking-as-a-service product is an unregistered securities offering, a case that is still pending in court.