The United States Internal Revenue Service (IRS) has recently issued a significant ruling impacting crypto investors in the country.
According to Revenue Ruling 2023-14, crypto investors must report their earnings from staking digital assets as gross income in the year they receive them.
Gross income includes any form of income, be it in money, property, services, or even staking rewards.
This ruling applies to cash-method taxpayers who receive crypto as compensation for validating transactions on proof-of-stake blockchains, regardless of whether they stake cryptocurrency directly or through a centralized crypto exchange.
The ruling clarifies that the fair market value of the staking rewards should be added to the investors’ annual income and determined at the time they gain control over the rewards.
“Dominion” is defined as the moment when the investor gains control and can sell, exchange, or otherwise dispose of the cryptocurrency rewards.
Notably, the IRS previously subjected crypto-mining rewards to both income and capital gains tax, but staking rewards were not covered until now.
The crypto tax firm Koinly acknowledged the lack of provisions for staking rewards until this new ruling.
Messari founder Ryan Selkis praised the ruling for taxing staking rewards only when they become accessible for sale.
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This means that rewards that are accrued but locked will not be taxable until the investor gains “dominion and control” over them.
Selkis also highlighted that the IRS is treating crypto staking similarly to stock dividends.
However, some experts expressed their disappointment with the ruling. Jason Schwartz, tax partner and digital assets co-head at Fried Frank, stated that the ruling was unsurprising but disappointing.
He argued that tax law traditionally required the existence of a payer, such as an employer or counterparty, for income to be taxable, making this ruling a departure from that norm.
This ruling comes amidst increased regulatory scrutiny in the crypto space. U.S. federal regulators, including the Securities and Exchange Commission (SEC), have been targeting crypto-staking service providers and exchanges, alleging that they are engaging in illegal securities sales.
In conclusion, the IRS’s latest tax bulletin requires U.S. crypto investors to report staking rewards as gross income in the year they receive them.
This move aims to clarify the treatment of income earned from staking digital assets for taxation purposes and brings staking rewards into the fold of taxable crypto earnings.
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