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Crypto Staking Taxes for 2024

by | Jul 1, 2024 | 2024, Accounting, Cryptocurrency | 0 comments

What is crypto staking?

Staking is the process by which cryptocurrency holders participate in the validation of blockchain transactions. Staking helps to keep the ledger accurate and consistent. This verification procedure is performed by computers on a specific blockchain network, which is typically aided by third-party staking services.

Staking is a method of receiving incentives for holding specific cryptocurrencies. If you own a cryptocurrency that enables staking, such as Ethereum, Tezos, Cosmos, Solana, Cardano, and others, you can “stake” a portion of your holdings to receive rewards.

Staked cryptocurrency earns incentives because it is actively used on the blockchain. Staking-enabled cryptocurrencies use a consensus technique known as Proof of Stake, which assures transaction verification and security without the need for a bank or payment processor. By opting to stake your cryptocurrency, you contribute to the process while receiving benefits in return.

How is staking taxed?

In 2023, the IRS issued advice stating that staking rewards are considered income at the time of receipt. This means that cryptocurrency earned through staking is taxed as income for US taxpayers.

How are staking rewards taxed?

Staking rewards are normally taxed as income when received and have authority and control over the tokens, and as capital gains when sold.

To calculate your crypto staking taxes, you must report the fair market value of your staking awards upon receipt or when you have dominion and control, which acts as your cost basis. If and when you sell your staking rewards, you’ll use this cost basis to determine your capital gains or losses.

Are staking rewards taxed twice?

When you sell cryptocurrency obtained through staking, you will trigger a capital gains event for either a realized loss or gain. It is crucial to note, however, that you will not be taxed twice on the same profits. You will not be required to pay capital gains tax on income for which you have previously paid income tax.

Latest IRS guidance on how to report crypto staking rewards on your taxes

In July 2023, the IRS announced new advice establishing when staking rewards are taxable as income:

“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.”- IRS

What is ‘dominion and control’ and how it relates to staking taxes

The IRS defines “dominion and control” as when an investor owns and has the capacity to sell, swap, or dispose of cryptocurrency awards.

According to Revenue Ruling 2023-14, bitcoin staking rewards are now treated as gross income. Taxpayers must disclose these profits in the year they were received. US taxpayers must report money earned from staking digital assets on proof-of-stake (PoS) blockchains on their annual tax returns.

There may be instances where staking benefits are not immediately taxed because an investor lacks “dominion and control.” For example, some platforms enabled users to stake Ethereum but restricted withdrawals until the Ethereum Merge was completed in April 2023. Some investors claimed that they did not have taxable income until they gained “dominion and control” over their coins. This is consistent with the current IRS instruction.

How to calculate staking rewards

Your staking incentives will vary based on the quantity staked and the accompanying rates. Here’s the calculation:

Daily Staking Rewards = (Principal + Accrued Staking Rewards so far) * ((1 + annualized Staking Rewards rate)^(1/365) – 1)

If you continue to stake both the principle amount and the earned staking rewards, your daily staking rewards will gradually rise over time. Staking reward rates may change while your funds remain in the account because of blockchain circumstances.

The fair market value of your staking rewards is normally the amount paid at the time of receipt. For example, if you earn 0.2 ETH every month via staking, you must calculate the fair market value of 0.2 ETH in USD for each individual day you got ETH over the year.

If an investor obtains staking incentives but is unable to quickly dispose of them, the fair market value of these awards is calculated when the investor has “dominion and control.” We will discuss dominion and control in relation to cryptocurrency staking taxes later in this post.

IRS forms to report crypto staking rewards on taxes

Individual US taxpayers can declare staking awards as ‘other income’ on Form 1040 Schedule 1. Capital gains on the disposal of staking awards are recorded on Form 1040 Schedule D.

Companies that receive staking awards utilize Schedule C. Any expenditure related to staking can typically be deducted as long as they are required for business operations.

How are staking pools taxed?

Staking payouts from staking pools are normally taxed as income when received, regardless of whether you choose to take them right away, because you have “dominion and control” over your coins as soon as you may withdraw them.

Depositing and withdrawing cryptocurrencies from a staking pool, like other wallet transactions, is unlikely to be taxed.

When to recognize income from staking rewards

Staking incentives are considered gross income by the IRS, and individuals must disclose them in their yearly tax return for the year they were received. The fair market value of staking prizes is calculated as of the day and time the taxpayer has dominion and control over the rewards, which is usually but not always upon receipt.

Crypto staking taxes FAQs

Here are the answers to several often asked questions concerning crypto staking taxes, including how to disclose staking rewards on taxes.

Do you pay tax on crypto staking?

Yes, taxes apply to cryptocurrency staking. In 2023, the IRS confirmed that staking awards are deemed income upon receipt, subjecting US citizens to income tax on crypto earned through staking. Additionally, when you sell or dispose of staking prizes, capital gains taxes are often levied.

The fair market value of staking incentives must be recorded upon receipt, creating the foundation for any capital gains computations when sold. Consult us at PSA CPA for further information on your unique situation.

What is the IRS rule on staking crypto?

As of July 2023, the IRS law on staking cryptocurrency treats staking awards as income at the time of receipt. If a taxpayer bets bitcoin on a proof-of-stake blockchain and receives extra units as a reward, the fair market value of these rewards is included in the taxpayer’s gross income for the taxable year in which dominion and control over the rewards is gained.

The term “dominion and control” refers to the ability of an investor to sell, swap, or dispose of cryptocurrency rewards. Adhering to these IRS requirements is critical for correctly reporting stake rewards on taxes.

Do I have to pay tax if I sell my staking rewards?

Yes, for US taxpayers, staking earnings are normally taxed as income when received and as capital gains when sold.

Is staking equipment tax deductible?

This depends on where you pay your taxes. Individual taxpayers are often unable to deduct staking equipment expenditures. However, if you purchased validator equipment for business reasons, you may be eligible to claim staking equipment expenses as a business expenditure.

Which IRS form do I report staking rewards on?

Schedule C is used by US-based self-employed taxpayers. Employees who earn a salary record their staking rewards as “other income” on Form 1040 Schedule 1.

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