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The Internal Revenue Service (IRS) has determined that U.S. cryptocurrency investors are required to report staking rewards as part of their gross income, as crypto assets are classified as property for federal income tax purposes.
An official document states that taxpayers must account for the fair market value of their staking rewards in their gross income at the moment they take control of the crypto assets.
IRS Confirms Taxability of Crypto Staking Rewards
In the Proof-of-Stake consensus model, crypto staking involves committing cryptocurrencies to validate transactions on the blockchain and earn rewards.
According to the IRS, since standard tax principles applicable to property transactions also apply to crypto transactions, rewards obtained from validation activities must be reported as gross income, similar to rent, royalties, and payments for goods and services.
The agency clarified that the fair market value of staking rewards is assessed at the date and time the crypto investor takes control of the assets. This also applies to investors who earn rewards by staking their assets via crypto exchanges.
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Additionally, taxpayers who receive cryptocurrencies as compensation for goods and services, including crypto miners, are required to include the fair market value of their assets in their gross income for the taxable year.
“If a cash-method taxpayer stakes cryptocurrency native to a proof-of-stake blockchain and receives additional units of cryptocurrency as rewards when validation occurs, the fair market value of the validation rewards received is included in the taxpayer’s gross income in the taxable year in which the taxpayer gains dominion and control over the validation rewards,” the IRS indicated.
Staking Challenges in the U.S.
This recent announcement comes as U.S. authorities intensify their scrutiny of crypto staking activities, prompting some exchanges to discontinue their staking services.
The U.S. Securities and Exchange Commission (SEC) has specifically targeted crypto staking activities since the start of this year. In February, the Commission charged the crypto exchange Kraken for offering its staking services as unregistered securities. The company subsequently agreed to cease the service and pay $30 million in disgorgement and civil penalties.
It is important to note that a U.S. judge instructed Kraken to provide sensitive user information to the IRS in June, enabling the agency to assess whether crypto investors were misreporting their taxes.
Meanwhile, the SEC has also initiated legal action against Coinbase, alleging, among other claims, that its staking-as-a-service offering constitutes an unregistered security. The case remains ongoing.
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