Staking Cryptocurrency May Still be Taxable

Staking Cryptocurrency May Still be Taxable

With cryptocurrency still all the rage these days — and still the ire of the IRS — US Taxpayers are still trying to actively increase their stake in cryptocurrency. In fact, one-way taxpayers can obtain cryptocurrency is through the process of crypto staking. Unlike typical crypto income tax-related issues involving the exchange of cryptocurrency or use of cryptocurrency as payment — the income tax implications of staking are not cut and dry. In order to get a general understanding of what crypto staking is and what the US tax implications and potential liabilities are — let’s review the basics of crypto staking in relation to US tax obligations.

Crypto Staking Definition

Crypto staking involves owners of cryptocurrency who may have the opportunity to assist in a validation process of transactions within a specific Blockchain database — and earn additional coins. Crypto staking requires the conducting extensive, time-intensive due diligence sufficient to confirm that a specific transaction is legitimate. The person conducting the staking can put up some of their own cryptocurrency or possibly borrow some from a person who already owns it — kinda sorta similar to the concept of short-selling — and then as a result of validating transactions they can earn certain rewards for their time — presuming the validated transaction is legitimate.

The Downside to Crypto Staking

As with anything related to cryptocurrency, there is a downside with staking — which primarily that a person validates a fraudulent transaction and therefore may lose some or all of the coins they pledged.

Tax Implications of Crypto Staking

The Tax rules involving staking are still in flux.

While there has been a lot of emphasis on the recent 2022 case of Jarrett, it is very important to note that thus far, the IRS did not agree that staking was not taxable. Rather, the US Government simply moved to dismiss the case and the IRS agreed to refund the taxes paid for the staking income. Despite the refund being issued, Taxpayers still asked the court to proceed on the merits — despite the Government’s motion to dismiss. If the motion to dismiss is granted, then there will be no ruling on the merits and the rules will continue in flux for the time being. Thus, the key important takeaway from Jarrett is that receiving the IRS refund is NOT the same as the US Government/IRS agreeing that staking is not taxable. Until the IRS determines affirmatively whether Staking is taxable or not, Taxpayers should be careful. That is because it is currently unclear if the staking is taxed when the crypto is received — or not until later when it is sold, exchanged, etc.

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