Staking clients ask when rewards are taxed. Revenue Ruling 2023-14 answers it for cash-method taxpayers who stake cryptocurrency native to a proof-of-stake blockchain. The rule is simple to state and hard to document, because the client needs a price at a specific date and time for every reward.
The holding
The ruling holds that if a cash-method taxpayer stakes cryptocurrency native to a proof-of-stake blockchain and receives additional units as rewards when validation occurs, the fair market value of the rewards is included in gross income in the taxable year in which the taxpayer gains dominion and control over them. The fair market value is determined as of the date and time the taxpayer gains dominion and control. The same is true when the taxpayer stakes through an exchange and receives additional units as a result of the validation.
The ruling's analysis rests on the idea of an accession to wealth. In its example, the taxpayer has dominion and control on the date the taxpayer is able to sell, exchange or otherwise dispose of the rewards. It also states that it does not address issues that may arise under rules not specifically cited, such as section 83. The ruling relies on the Glenshaw Glass definition of gross income, the rule that any receipt of property is income at its fair market value at the date and time it is reduced to undisputed possession, and the treatment of mining, where a miner includes the fair market value of mined cryptocurrency in the year the miner obtains dominion and control.
Basis and the later sale
The reward is income when received, and the amount included becomes the basis of the units, consistent with Revenue Procedure 2024-28, which says the basis of digital asset units received as gross income under section 61 is generally determined by reference to the amount includible in gross income. Gain or loss on a later sale is measured from that basis. The revenue procedure defines the acquisition date of a unit to include acquisition by reward, so each reward is its own lot with its own date. Keep the income entry and the later sale linked so the same appreciation is not taxed twice.
Worked example. A client stakes tokens and receives 0.05 units at 2:10 p.m. on March 3, when the market price is $3,000 per unit.
- Income: 0.05 times $3,000, or $150.
- Basis in the 0.05 units: $150.
- The client sells those units six months later at $3,600 per unit: proceeds of 0.05 times $3,600, or $180.
- Gain: $180 minus $150, or $30.
If the same client received a reward every day, the workpaper would have 365 income entries and 365 basis lots. The volume is why records matter.
Records to request
- Platform or validator reports with date, time and quantity of each reward.
- The price source and method used to value each reward at the time dominion and control began, kept consistent across the year.
- Lock-up and unbonding terms. If the client cannot sell, exchange or dispose of the units until later, the dominion and control date is a judgment that should be explained in a memo, with the section 83 caveat in the ruling noted.
- Wallet or account identifier for each lot, so the lots feed the wallet-by-wallet basis ledger.
- Any slashing events. The ruling describes slashing as the forfeiture of staked units, in whole or part, when validation is unsuccessful; the ruling does not address how to treat a forfeiture.
The broker form will not help here. The Form 1099-DA instructions state that rewards and staking payments are not reported on the form, as discussed in the Form 1099-DA guide.
Second example: the ruling's own facts
Taxpayer A owns 300 units of M and stakes 200. A validates a block and receives 2 units as rewards. Under the M protocol, A cannot sell, exchange or dispose of the 2 units for a brief period ending on Date 2. On Date 3, the following day, A can. The ruling holds that A has an accession to wealth on Date 3, and the fair market value of the 2 units on that date and time is gross income for the year that includes Date 3.
Apply it to a December 31 and January 1 boundary. If the lock ends at 11:00 p.m. on December 31, the income belongs to that year even though the rewards were earned days earlier. If the lock ends on January 1, the income belongs to the next year. Using hypothetical numbers: 2 units at $2,000 each on Date 3 gives $4,000 of income and a $4,000 basis for the 2 units. The other 298 units are not income; only the 2 reward units are.
Common errors
- Taxing the reward when the validator is selected or the block is built, rather than when the client can first sell, exchange or dispose of it.
- Using a daily average price instead of the price at the date and time of dominion and control.
- Treating the basis of the reward as zero and taxing the full proceeds at sale, which taxes the same value twice.
- Assuming the broker form captures the reward. The Form 1099-DA instructions say not to report rewards and staking payments on that form.
- Applying the ruling to an accrual-method client. The holding is stated for cash-method taxpayers.
- Folding gas or transaction fees into the computation. The ruling states its facts do not address them.
Step checklist
- Pull the reward ledger by wallet, with timestamp and quantity.
- Identify the date and time each reward became transferable.
- Value each reward at that timestamp from a documented price source.
- Post income and create a basis lot at the same amount.
- Link each later sale to its lot.
- Reconcile total reward income to the client's return.
Frequently asked questions
Does staking through an exchange change the answer?
No. The holding states the same result when a taxpayer stakes through a cryptocurrency exchange and receives additional units as a result of validation.
Does the ruling say rewards are ordinary income?
The ruling holds that the value is included in gross income. It does not discuss how the income is classified or taxed beyond inclusion.
Is the ruling limited to certain tokens?
It addresses cryptocurrency native to a proof-of-stake blockchain, in the hands of a cash-method taxpayer.
Accounting side
For entity clients, staking rewards are an accounting question as well, covered in the digital assets audit guide. Tax income and book income can differ in timing and measurement, which requires a deferred tax analysis.
Sources
- Internal Revenue Service, Revenue Ruling 2023-14: https://www.irs.gov/pub/irs-drop/rr-23-14.pdf
- Internal Revenue Service, Revenue Procedure 2024-28 (basis of units received as income, section 3.03): https://www.irs.gov/pub/irs-drop/rp-24-28.pdf
- Internal Revenue Service, Digital assets: https://www.irs.gov/filing/digital-assets
- Internal Revenue Service, Instructions for Form 1099-DA (rewards and staking payments not reported): https://www.irs.gov/instructions/i1099da
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