Staking Rewards Tax Treatment: What US Investors Need to Know

By Robert Stukes On 10 Dec, 2024 Comments (25)

Staking Rewards Tax Calculator

Staking Reward Details

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Business

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Enter values and click "Calculate Tax Implications" to see your tax breakdown.

Ever wondered why the IRS suddenly shows up on your crypto‑staking dashboard? The short answer: staking rewards are taxable income the moment you can move them, and any later sale can trigger a capital‑gain event. Below you’ll find a step‑by‑step rundown of how the United States treats staking rewards, what forms you’ll need, and how to keep records so the tax man doesn’t bite.

Why staking rewards aren’t “just” crypto‑interest

When you lock up assets on a proof‑of‑stake network, you’re not earning a simple interest‑style payment. The IRS looks at the reward as ordinary income because you receive a new piece of property - a token - that you can sell or transfer. The agency cemented this view in Revenue Ruling 2023‑14, which introduced the “dominion and control” test for cash‑method taxpayers. In plain English, the moment you gain the ability to dispose of the reward, that dollar amount becomes taxable.

When does the tax window open? The dominion and control standard

Imagine you earn 0.2ETH each month from staking. The IRS says you must record the fair market value (FMV) of that 0.2ETH on the exact day you receive it, regardless of whether you keep it, sell it, or move it to another wallet. The rule applies whether the reward comes straight from the blockchain or via a centralized exchange that reports on Form 1099‑MISC. The timing rule creates a cash‑flow challenge: you may owe tax on a reward you haven’t yet turned into cash.

Calculating ordinary‑income tax on receipt

Here’s the practical workflow:

Identify the receipt date for each reward batch.
Look up the USD FMV on that date (CoinMarketCap, CoinGecko, or an exchange price are acceptable).
Multiply the token amount by the FMV to get the taxable amount.
Sum all monthly amounts for the tax year and report them as "Other Income" on Schedule1, Line8, unless you qualify as a business (see below).

For example, if you receive 0.2ETH on March15, 2025, and the FMV is $1,800, you report $360 of ordinary income for that day.

What happens when you sell the reward? Capital gains rules

Later, when you decide to cash out, you create a second taxable event. The difference between the sale price and the FMV you reported as income becomes a capital gain (or loss). Holding period matters:

Short‑term (≤1year): taxed at ordinary‑income rates.
Long‑term (>1year): taxed at the lower long‑term capital‑gain rates (0‑20%).

Suppose you held that 0.2ETH for 14months and sold it when ETH was $2,200. Your cost basis is $360, sale proceeds $440, so you have a $80 long‑term gain taxed at the applicable rate.

Business vs hobby: Which tax form applies?

If staking is a side‑project you treat as a hobby, you’ll report the income on Schedule1. However, if you run a dedicated staking operation - think multiple nodes, paid staff, or significant capital outlay - the IRS may view it as a trade or business. In that case:

Report earnings on ScheduleC (Profit or Loss from Business).
Pay self‑employment tax (15.3% on net earnings).
Deduct legitimate expenses (hardware, electricity, internet, software).

The line between hobby and business hinges on profit motive, time commitment, and whether you maintain proper books. BDO USA advises a thorough self‑assessment to avoid a bad audit surprise.

Reporting requirements from exchanges

Many exchanges now issue Form 1099‑MISC for staking rewards. The document shows the total USD value they calculated, but the IRS expects you to reconcile that with your own records. Failure to report a Form 1099‑MISC can trigger an audit - the Gordon Law Group reports that over 80% of crypto‑related audits start with a missing 1099.

Record‑keeping best practices

Accurate logs are the backbone of compliant staking tax reporting. Capture the following for each reward event:

Date of receipt.
Token amount received.
USD fair market value on that date (source citation).
Source of the reward (direct blockchain, exchange, DeFi platform).
Subsequent disposition details (date sold, proceeds, holding period).

Automated tools like Blockpit can import transaction data, calculate FMV, and generate the Schedule1 line items for you.

Ongoing litigation and future uncertainty

The current framework comes from the July2023 IRS guidance, but the case Jarrett v. United States challenges it. The plaintiff argues staking rewards are “self‑created property” - akin to mining minerals - and should only be taxed when sold. While the courts haven’t ruled yet, the dispute highlights that tax treatment could shift, especially if the Sixth Circuit sides with the taxpayer.

Quick reference table

Tax events for staking rewards
Event	Tax classification	Tax rate	Form / Schedule
Reward receipt (dominion and control)	Ordinary income	Marginal income tax rate	Schedule1, Line8 (hobby) or ScheduleC (business)
Sale / disposal	Capital gain or loss	Short‑term: ordinary rate; Long‑term: 0‑20%	Form8949 & ScheduleD
Exchange‑issued 1099‑MISC	Reporting requirement	Matches ordinary income amount	Form1099‑MISC (info only)

Action checklist for the upcoming tax season

Gather all staking reward statements (exchange 1099‑MISC, blockchain receipts).
Log each reward’s USD FMV on the receipt date - use a reputable price source.
Determine if you qualify as a business; if so, calculate deductible expenses.
Prepare Schedule1 or ScheduleC entries for the total ordinary‑income amount.
Track each token’s eventual sale to compute capital gains or losses.
Consider a tax‑software integration (e.g., Blockpit) to automate reporting.

Key takeaways

Staking rewards trigger two distinct tax events: income when you receive them, and capital gains when you later sell. Record‑keeping is non‑negotiable, and the form you file depends on whether the activity is a hobby or a business. Stay alert for the outcome of Jarrett v. United States, which could reshape the timing of income recognition. Until then, treat the staking rewards tax as an ordinary‑income event on receipt and plan for possible capital‑gain tax on disposal.

Frequently Asked Questions

Do I have to pay tax on staking rewards if I never sell them?

Yes. The IRS treats the reward as ordinary income the moment you gain control, regardless of whether you later convert it to fiat. You must report the USD fair market value on the receipt date.

What if I receive staking rewards on a foreign exchange?

U.S. tax law applies to worldwide income. You still owe tax on the USD value of the reward on the receipt date. Keep foreign‑exchange conversion records to substantiate the FMV.

Can I deduct the cost of my staking hardware?

Only if you file ScheduleC as a business. Expenses like servers, electricity, and internet can be deducted against your staking income. Hobbyists cannot claim these deductions.

How do I report staking income on my tax return?

For hobby‑level staking, list the total USD amount on Schedule1, Line8 under "Other Income." For business‑level staking, report net profit on ScheduleC and pay self‑employment tax.

What records should I keep for future audits?

Keep a spreadsheet or crypto‑tax software export that shows: date of reward, token amount, USD fair market value, source of reward, and any subsequent sale details (date, proceeds, holding period). Also retain 1099‑MISC forms and receipts for hardware or electricity expenses.