Understanding U.S. Crypto Staking Taxes in 2023: A Comprehensive Guide

Staking crypto is becoming increasingly popular due to its potential to earn passive income, but with this comes the complexity of understanding the associated tax implications. Here’s a concise breakdown of how staking taxes work for crypto, especially in the U.S.

For a general overview on the state of cryptocurrency taxation in the U.S. see this article. Staking?

This involves participating in a Proof of Stake (PoS) blockchain’s governance by locking up a certain amount of cryptocurrency as collateral. The participants, in return, get additional crypto for validating transactions. This method is both eco-friendly and a way to earn passive income while supporting the blockchain.

DeFi Staking:

Refers to committing cryptocurrency to a DeFi (Decentralized Finance) protocol. Some protocols reward you for adding liquidity, often through transaction fees from other platform users.

Tax Implications for Staking

As of 2023, the IRS clarified that staking rewards are viewed as income upon their receipt. The income is calculated based on the fair market value of the cryptocurrency at the time it's received.

Capital Gains Tax:

If you later sell the crypto earned from staking, any gain or loss relative to the price at which you acquired the staking rewards would be subject to capital gains tax. However, you won't be taxed twice on the same amount; you'd only pay capital gains tax on any appreciation beyond your initial income recognition.

DeFi Staking:

Generally, DeFi staking is taxable as income. Some protocols might involve crypto-to-crypto swaps for staking/unstaking, which might be subject to capital gains tax, similar to other crypto-to-crypto trades.

Recognizing Income:

There's a principle called ‘dominion and control’ that plays a pivotal role. Tax experts surmise that staking rewards are deemed ‘received’ when investors can freely trade or sell them. This means that even if they're in a third-party’s custody but you can access them, they’re likely taxable. If rewards can’t be withdrawn, there might be no taxable event until such control is established.

Staking Pools:

They let investors combine their staked crypto to have a larger stake collectively, potentially earning more staking rewards. Taxes on rewards from staking pools work similarly to individual staking. The key is whether you have 'dominion and control' over the rewards, not necessarily if you've withdrawn them.

Determining Fair Market Value:

• Check Cryptocurrency Exchanges:

  • Refer to the current trading price on major U.S.-based exchanges like Coinbase, Kraken, or Binance US. If there's variance, consider an average of these prices.

• Historical Price Data:

  • Use platforms like CoinMarketCap or CoinGecko for past data on a specific date and time.

• IRS Guidance:

  • The IRS suggests that if the cryptocurrency is listed on an exchange and the exchange rate is established by market supply and demand, the FMV can be determined through the exchange itself.

• Consider Time and Date:

  • The exact time of a transaction can influence the FMV due to crypto's volatile nature. Ensure you're referencing the value at the specific time of your transaction.

When determining the FMV for tax purposes, always ensure that your method aligns with IRS guidelines and is consistently applied across all your transactions.

Deductions:

If you've acquired staking equipment for business purposes, the costs might be deductible. For individuals, such deductions are not available.

Reporting on Tax Returns:

Individual taxpayers can include staking rewards as 'Other Income' on Form 1040 Schedule 1. Businesses engaged in staking can report on Schedule C and might be able to deduct related expenses.

Tax Implications Globally:

Australia: Staking rewards are taxed similarly to the U.S. - as income upon receipt and capital gains upon disposal.

Canada: The CRA (Canadian Revenue Agency) hasn't provided specific guidance, but likely, staking rewards are taxed as business income.

UK: The HRMC views staking rewards as income upon receipt. Disposing of these rewards can lead to capital gains or losses. You can read more about the tax implications of staking rewards in the U.K. in this article

To ensure you're compliant with the tax laws, always consult with a tax professional or CPA, especially when dealing with complex transactions like crypto staking.

Need More Help?

If you find that you are in need of more help regarding your cryptocurrency income do not hesitate to contact us. Our team of chartered accountants are always at hand to help you.