Is Crypto Staking Taxable as Income or New Property?

The IRS isn’t playing around when it comes to crypto staking. In a landmark move, the agency reaffirmed that staking rewards are taxable as soon as they hit your wallet.  This position, detailed in Revenue Ruling 2023-14, has sparked a high-stakes legal battle with Joshua and Jessica Jarrett, a Tennessee couple staking Tezos tokens. At the heart of the debate is a critical question: Should staking rewards be taxed immediately, or only when they’re sold or exchanged? This pivotal case has far-reaching implications, not just for the Jarretts but for all proof-of-stake network participants. The outcome could redefine how staking rewards are taxed, shaping the future of cryptocurrency regulations in the U.S.

The Legal Cage Match

The Jarretts’ legal journey began in 2021 when they sought a $3,293 refund for taxes paid on 8,876 Tezos tokens earned in 2019. Their argument was straightforward: Staking rewards are akin to growing crops or manufacturing goods not taxable until monetized. This reasoning challenges the IRS’s current view, which treats rewards as taxable income the moment they’re under the recipient’s control.

In 2022, the IRS attempted to quash the case with a $4,000 refund, which the Jarretts rejected to continue their fight for a broader precedent. They’ve since filed a second lawsuit in 2024, seeking a $12,179 refund for taxes paid on 13,000 tokens earned in 2020. Their fight underscores the urgent need for clarity in adapting traditional tax laws to blockchain and decentralized finance.

If You’ve Got It, We’ll Tax It

According to the IRS, staking rewards represent taxable income as soon as they are “in your dominion and control”—essentially, as soon as you can use or access them. This means the moment tokens hit your account, you’re liable for taxes based on their market value at the time of receipt, even if you don’t sell or trade them.

The IRS has rejected the argument that these rewards are “new property,” like crops or books, instead comparing them to wages or rental payments. Revenue Ruling 2023-14 solidifies this stance, leaving little room for interpretation and creating significant challenges for staking participants.

Implications for Staking Participants

This isn’t just a legal battle for one couple—it’s a precedent-setting case that could impact anyone staking on proof-of-stake networks like Ethereum, Cardano, or Tezos. If the IRS wins, staking participants could face immediate tax liabilities on rewards, regardless of whether the tokens are held, sold, or their value fluctuates. For example, imagine earning $1,000 in staking rewards during a market high. Even if the value drops to $600 before you sell, you’d still owe taxes on the original $1,000 value. Such scenarios could lead to cash flow issues and potentially discourage participation in staking.

Conversely, a win for the Jarretts could provide much-needed flexibility, allowing taxes to be deferred until rewards are sold or exchanged, aligning taxation with real economic gain.

What You Should Do Now

While the courts deliberate, staking participants should take proactive steps to avoid surprises:

• Document Everything: Keep detailed records of staking rewards, including their value at the time of receipt.
• Prepare for Tax Bills: Set aside funds to cover potential liabilities, even if you’re holding tokens.
• Seek Professional Advice: Crypto taxes are complex. A knowledgeable advisor can help navigate current rules and prepare for future changes.

Don’t Get Caught Holding the Bag

Crypto staking is here to stay, but so are the taxes. Until there’s clarity, the smart move is to play by the rules while staying ready to adapt. This court battle isn’t just legal drama, it’s a pivotal moment that could shape the future of crypto taxation in the U.S. Stay informed, stay organized, and stay ahead. Because when it comes to crypto and taxes, you don’t want to be caught off guard. Subscribe to MYCPE ONE Insights for the latest in finance, accounting, and corporate news delivered straight to your inbox.