MSTR Cat

Crypto Law/Level II · Tax: the first trap/2.2 Income from crypto/Lesson 2

Staking rewards

How the IRS taxes proof-of-stake rewards when you gain control of them, the court challenge that is still running, and the open questions around liquid staking.

Education, not legal, tax or investment advice. Crypto law differs between countries and states and changes often. Check the current rules where you live with a qualified lawyer or tax adviser before you act.

The lean path

The cheapest, lowest-tax, simplest and most private route the law allows, best first. Each step names the rule it rests on and the condition that keeps it lawful.

  1. Rewards that stay locked are not income until you can sell or move them, under Rev. Rul. 2023-14; report them in the year control begins, valued at that moment, not when they first appear.
  2. Each reward’s income value becomes its basis; holding rewards more than a year makes later gains long-term, taxed at 0% up to $49,450 taxable income (single) in 2026.
  3. Brokers need not report staking under Notice 2024-57, so no form may arrive, yet the income still goes on Schedule 1; staking as a business allows expense deductions but adds 15.3% self-employment tax.
  4. Those persuaded by the Jarrett argument can report under Rev. Rul. 2023-14 and then claim a refund on Form 1040-X within section 6511’s window (3 years from filing or 2 from payment), accepting litigation cost and uncertainty.
  5. Liquid staking swaps have no IRS ruling; take a reasonable, consistent position and consider disclosing it on Form 8275 to reduce accuracy-related penalty exposure under section 6662.

MaterialsIRS Revenue Ruling 2023-14 on staking rewards (irs.gov)The reward history from your staking provider or validator, showing when each reward became withdrawableIRS Notice 2024-57, section 3.04, on staking and broker reporting

Wonder

  1. Am I taxed when rewards appear in my account or only when I sell them?
  2. What if my rewards are locked and I cannot move them yet?
  3. Is swapping my coins for a liquid staking token a taxable event?

Explore

  1. In a proof-of-stake blockchain, holders lock up, or stake, coins so the protocol can select them to validate new blocks. Successful validators receive new coins as rewards; failures can be punished by slashing, the forfeit of some staked coins. Ethereum switched from mining to proof of stake at the Merge on 15 September 2022, and running your own Ethereum validator requires 32 ETH. Many holders instead delegate to a validator, or stake through an exchange that handles the technical work and passes on rewards after a fee. Each route raises the same tax question: when do the rewards become income?
  2. The IRS answered for US federal tax in Revenue Ruling 2023-14, dated 31 July 2023. A cash-method taxpayer, which covers most individuals, includes the fair market value of validation rewards in gross income in the year the taxpayer gains dominion and control over them, valued at the date and time of that control. Dominion and control means the ability to sell, exchange or otherwise dispose of the coins. In the ruling’s example, rewards locked by the protocol until Date 3 became income on Date 3. The ruling says the same rule applies to staking through an exchange. It does not address section 83 or transaction fees.
  3. The rule has been challenged in court. Joshua and Jessica Jarrett, Tennessee taxpayers who stake Tezos tokens, argue that staking creates new property, so tax is owed only when the tokens are sold. In their first refund suit, for 2019, the IRS sent a full refund instead of defending, and the Sixth Circuit affirmed dismissal of the case as moot on 18 August 2023 (79 F.4th 675), without deciding the question. The Jarretts filed a second suit for 2020 in October 2024 (M.D. Tenn. No. 3:24-cv-01209). After summary-judgment briefing in 2026, the court postponed the trial in August 2026; no ruling on the merits had been entered.
  4. Rewards often arrive daily or even more often, so each one is a small income item with its own dollar value, and that value becomes the basis of those coins (lesson 2.3.1). The IRS digital-assets page lists staking among receipts that require a Yes on the Form 1040 question (lesson 2.3.4) and points staking income to Schedule 1, or Schedule C if it is a business. Do not expect Form 1099-DA to capture it (lesson 2.3.5): under Notice 2024-57, brokers need not report staking transactions occurring from 1 January 2025. Income is reportable whether or not any form arrives.
  5. Liquid staking means depositing coins in a pool for a tradable token representing the staked position. Notice 2024-57 lists swapping a coin for such a pool token, and redeeming it, among transactions brokers need not report, and states that no inference is intended about their tax treatment. The IRS has not ruled whether that swap is a taxable exchange (lesson 2.1.3). Rev. Proc. 2025-31, for tax years ending on or after 10 November 2025, lets exchange-listed trusts holding one proof-of-stake asset stake without losing trust tax status. On 29 May 2025 SEC staff said protocol staking is not a securities offering; the statement has no legal force and excludes liquid staking.
  6. The United Kingdom takes a similar approach. HMRC’s Cryptoassets Manual (page CRYPTO21200) says staking may be a trade depending on the degree of activity, organisation, risk and commerciality; if it is not, the sterling value of tokens at receipt is miscellaneous income, with appropriate expenses deducted, and Capital Gains Tax may apply on a later disposal. A practical check: download the reward history, note for each reward when it became withdrawable rather than merely visible, value it at that time from one consistent source, and compare the total with what you reported. This lesson explains the rules and does not give tax advice.

Key facts

  • Rev. Rul. 2023-14 requires a cash-method taxpayer to include staking rewards in gross income in the year the taxpayer gains dominion and control over them.
  • Under Rev. Rul. 2023-14 the rewards are valued at the date and time the taxpayer gains dominion and control, and the same rule applies to staking through an exchange.
  • The Sixth Circuit affirmed dismissal of the Jarretts’ first staking refund suit as moot on 18 August 2023, without deciding whether staking rewards are income on receipt.
  • The Jarretts’ second suit, for the 2020 tax year, was filed in the Middle District of Tennessee in October 2024 and had no ruling on the merits as of August 2026.
  • Notice 2024-57 relieves brokers from reporting staking transactions occurring on or after 1 January 2025 and says no inference is intended about their tax treatment.
  • Rev. Proc. 2025-31 provides a safe harbor for exchange-listed investment trusts to stake a single proof-of-stake asset without losing trust status.

Exercise nine, six, three, one

9CollectList up to 9 staking situations you hold or have read about, such as staking on an exchange, delegating to a validator, running a validator, liquid staking or rewards that are locked for a period.
6ClusterSort them into 6 categories: rewards withdrawable at once, rewards locked for a time, exchange staking, delegated staking, liquid staking tokens, and cases where you are unsure when control begins.
3DistillReduce the 6 categories to 3 groups: income timing settled by Rev. Rul. 2023-14, timing that depends on when the lock ends, and treatment the IRS has not addressed.
1CrystallizeWrite 1 sentence stating, in your own words, the moment at which US tax law treats a staking reward as income.

Fact check

Dates, figures and claims checked against the published sources listed below.

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