A new revenue ruling from the IRS addresses an issue pertaining to crypto staking taxation.
According to Coindesk.com, staking is "a popular way to earn passive income with ... crypto investments." It is "the crypto equivalent of putting money in a high-yield savings account. When you deposit funds in a savings account, ... you receive a portion of the interest earned from lending—albeit a very very low portion. Similarly, when you stake your digital assets, you lock up the coins in order to participate in running the blockchain and maintaining its security. In exchange for that, you earn rewards calculated in percentage yields. These returns are typically much higher than any interest rate offered by banks."
In the revenue ruling, the IRS stated the issue as follows: "If a taxpayer that uses a cash method of accounting (cash-method taxpayer)
stakes cryptocurrency native to a proof-of-stake blockchain and receives additional units
of cryptocurrency as rewards when validation occurs (validation rewards or rewards),
must the taxpayer include the value of the rewards in the taxpayer's gross income and,
if so, in which taxable year?"
After providing an overview of cryptocurrency, the IRS provided the answer: “If a cash-method taxpayer stakes cryptocurrency native to a proof-of-stake blockchain and receives additional units of cryptocurrency as rewards when validation occurs, the fair market value of the validation rewards received is included in the taxpayer's gross income in the taxable year in which the taxpayer gains dominion and control over the validation rewards. The fair market value is determined as of the date and time the taxpayer gains dominion and control over the validation rewards. The same is true if a taxpayer stakes cryptocurrency native to a proof-of-stake blockchain through a cryptocurrency exchange and the taxpayer receives additional units of cryptocurrency as rewards as a result of the validation.”
According to Accounting Today, Rev. Ruling 2023-14 will be published in the Internal Revenue Bulletin 2023-33 on Aug. 14.