Cryptocurrency has become one of the most popular investment trends, especially among younger professionals seeking to diversify their portfolios. It’s not just the potential for big gains that draws people in; it’s the idea of being part of a whole new financial system.
Bitcoin, Ethereum, and altcoins have taken the world by storm. Many view crypto as the future of finance. One aspect gaining traction is staking. If you’ve explored crypto mining, you’re probably familiar with earning crypto by contributing to a network. But staking takes it a step further.
In this article, we’ll explain what staking is, how it’s taxed, and the pros and cons of getting involved. I’ll also break down the tax implications you need to know, as the IRS is paying close attention to crypto transactions. It’s one of the first things they ask about on your tax forms — right after your name and social security number.
Many uninformed gurus claim that crypto isn’t taxable simply because you can’t easily trace transactions. But if you’ve ever wondered whether your crypto investments might trigger taxable events, especially when staking for rewards, keep reading. You might be surprised by how this new asset class is taxed.
If you’re curious about how staking compares to mining, check out our previous article on mining crypto.
What is Staking in Crypto?
Staking allows you to earn rewards by holding and “staking” your coins in a crypto wallet to support a blockchain network. Think of it like putting money into a high-yield savings account. Instead of earning interest from a bank, you earn rewards from the blockchain.
Staking is central to cryptocurrencies that use Proof of Stake (PoS), a more energy-efficient alternative to Proof of Work (PoW), used by Bitcoin.
When you stake your coins, you help the network maintain its integrity. Essentially, you’re lending your crypto to verify transactions, and in return, you earn rewards. These rewards are typically paid in the form of more crypto. Unlike Bitcoin mining, which requires solving complex problems, staking helps secure the blockchain and validate transactions in a simpler, energy-efficient way.
The good news? Staking offers an easy way to grow your crypto holdings over time, without actively trading or buying new coins. But as with everything, staking has its complexities, especially when it comes to taxes. More on that shortly.
How Does Staking Relate to Taxable Events?
Staking is a simple way to passively grow your holdings. But when it comes to taxes, there’s no such thing as a “free lunch.” The IRS takes crypto transactions seriously, and that includes staking.
What’s a taxable event? A taxable event is anything that results in a gain or loss. The IRS requires you to report that. As crypto’s popularity rises, the IRS has added crypto-related questions to Form 1040, the income tax form used by most taxpayers.
Right after entering your personal details, one of the first things the IRS asks is whether you’ve engaged in any crypto transactions. This includes buying, selling, or trading digital assets. Why? They want to know if any of your activities have resulted in taxable gains.
In 2024, the IRS released some guidance on this topic. You can find it HERE. If you’re impatient… let me give you the cliff-notes: Staking counts as a taxable event.
How is Crypto Taxed?
Crypto is taxed just like any other investment. If you make capital gains, you’ll pay taxes. The IRS classifies crypto as property, meaning any profits you make from selling, trading, or using it are subject to capital gains tax. The tax rate depends on how long you hold your crypto.
- Short-term capital gains apply if you hold crypto for one year or less. These are taxed at your regular income tax rate.
- Long-term capital gains apply if you hold for more than one year. They are taxed at reduced rates (usually 0%, 15%, or 20%, depending on your income).
For staking, it’s important to note that the rewards you earn are taxable as well. These rewards are treated as ordinary income, based on the fair market value of the coins at the time you receive them. This means even if you don’t sell your staked crypto right away, you still owe taxes on the rewards you’ve earned from staking.
How is Staking Taxed Specifically?
When you stake your crypto, the IRS treats the rewards as income. You’ll owe taxes on the value of the crypto you receive through staking, just like you would on regular income.
For example, let’s say you stake 10 Ethereum (ETH) and earn 1 ETH as a reward. The IRS considers that 1 ETH as income, and you’ll owe taxes on the market value of that 1 ETH when you receive it. It’s taxed at your ordinary income rate.
You don’t have to sell your staked crypto to trigger this taxable event. Even if you just hold the rewards in your wallet, you still need to report their value.
If you stake in a PoS network that pays rewards in a different coin (e.g., staking Ethereum but receiving rewards in a stablecoin), you still need to report the rewards as income, based on their market value at the time they’re received. Crypto values can change rapidly, so make sure to track the values at the time of receipt.
That’s where smart tax planning makes the difference. By reducing your ordinary income, you can lower the tax hit on your staking rewards (simply because your taxable income is lower). Pretty straightforward, right?
The Pros and Cons of Staking
Staking offers an exciting way to earn crypto rewards, but it comes with both benefits and risks.
Pros:
- Passive Income: Staking offers an easy way to earn passive income, allowing your crypto to grow without active trading.
- Support for the Network: By staking, you help secure the blockchain, contributing to the cryptocurrency’s overall success.
- High Rewards: Depending on the network, staking can provide high annual rewards — sometimes as much as 10% to 20%.
Cons:
- Locked Assets: You might have to lock your coins for a set period, limiting your access to funds if an emergency arises or if you find a better investment.
- Risk of Slashing: Some PoS networks penalize you for being offline or not maintaining your stake. This penalty is called “slashing,” and it could cost you part of your staked coins.
- Tax Complexity: As mentioned earlier, staking rewards are taxable, which can be a headache during tax season. You might owe taxes on rewards before you even sell your staked crypto.
Example:
If you stake 50 ETH and earn 5 ETH in rewards, you’ll owe taxes on the 5 ETH, even if you haven’t sold it. If ETH’s value rises, the tax burden could become significant, especially if you didn’t plan for it.
Final Thoughts
Crypto staking is a great way to earn passive income and grow your portfolio, but it comes with tax implications you shouldn’t ignore. Whether you’re just starting or have been staking for a while, understanding how the IRS taxes staking rewards is key to avoiding surprises at tax time.
Track the market value of your rewards when they’re received, and don’t hesitate to consult a knowledgable tax professional, like yours truly, to ensure compliance with IRS rules.
Welcome to the New Age of Accounting. Let’s begin.
Chris is the Managing Partner at Weston Tax Associates, a best-selling author, and a renowned tax strategist. With over 20 years of expertise in tax and corporate finance, he simplifies complex tax concepts into actionable strategies that drive business growth. Originally from Sweden, he now lives in Florida with his wife and two sons.
