Crypto Staking & Taxes for US Investors

Disclaimer: This article is for educational purposes only. It does not constitute tax or financial advice. Always consult with a licensed professional before making decisions on your tax filings.

This guide is part of the “Guide to Staking Crypto” series.

Proof-of-Stake (PoS) networks have completely changed how investors think about digital assets. Instead of relying on mining, people can now earn rewards directly on-chain by staking tokens like ETH, ADA, and SOL. For many, staking rewards feel like a simple form of yield, not needing any extra documentation. But once tax season rolls around, the story gets depressing.

The problem is that the IRS guidance has not always been crystal clear in the realm of crypto. Investors are left asking questions like: Are staking rewards taxable as ordinary income? How do I track fair market value when I receive rewards? What happens as I sell those tokens for a profit?

This guide aims to reduce all that confusion. We will explain the main taxable events, show you how to calculate cost basis, and explain how the IRS currently handles staking rewards.

The IRS & how they tax staking rewards

The IRS has taken a firm position that staking rewards are a taxable income. The initial guidance is clarified in Notice 2014-21, which established that mining rewards count as ordinary income and that cryptocurrency is “property” not currency, for tax purposes. 

Revenue Ruling 2023-14 later applied this reasoning to PoS rewards, indicating that staking rewards are taxable as ordinary income when you gain “dominion and control” over them. In plain English, dominion and control means you can transfer, sell, or otherwise use the tokens. Every time crypto lands into your wallet, the IRS sees a taxable event.

Investors need to keep track of two distinct events for tax purposes:

1. When you receive the rewards, they are treated as taxable income at their fair market value.
2. When you later sell or trade those rewards, a separate calculation is made for capital gains or loss. This is the same type of tax you would declare if you were to sell stocks, bonds, precious metals and property.

Let’s go over what each of these means and how you can keep track of them.

Taxable event #1: Receiving rewards as ordinary income

When you receive rewards from staking, the IRS requires you to report them as ordinary income. The amount is based on the fair market value of the tokens in US dollars at the time they become accessible in your wallet. Let’s go over how to calculate the fair market value.

Calculating income with fair market value

Fair market value simply means the market price in dollars at the time of receipt. For example, if you receive 1 ETH as a staking reward when ETH is trading at $11,000, you must report $11,000 in taxable income. That $11,000 becomes your cost basis for future calculations.

Accurate record keeping at this stage is critical. Each time you receive rewards, you should write down the date, the number of tokens, and the fair market value. 

Ideally you want to pair your records with one of the following. For crypto, these are the virtual equivalents of receipts:

• Exchange or wallet transaction history – these can be CSV exports or screenshots showing the date, time, token amount, and market value.
• Blockchain explorers – Etherscan, Solscan, etc. can verify transaction details and timestamps.
• Crypto tax software – these consolidate your data, calculate fair market value at the time of receipt, and generate IRS-ready reports. This software can really help ease the process, especially if you are collecting hundreds or thousands of small staking rewards over the course of a year. You can find recommended software in “Reporting your staking taxes”.
• Manual logs – these are your personal spreadsheets with date, token amount, and fair market value. While useful, ideally should be paired with one of the above as proof.

Think of it like keeping receipts for a business expense: you wouldn’t just write “$200 spent on supplies,” you’d keep the invoice. In crypto, your “invoices” are the wallet records, exchange statements, and exported reports.

A final note, if rewards are locked-up and you cannot transfer them, they are generally are not considered taxable income until you gain control. This exception prevents you from paying taxes on tokens you cannot use yet.

Taxable event #2: Selling rewards as capital gains

The second taxable event happens when you sell, trade, or spend your staking rewards. At that stage, you calculate capital gains (or loss) using the cost basis you established when the rewards were first recognized as income. Here is what that means:

Establishing your cost basis

Your cost basis is the fair market value that was already reported as ordinary income when you received the rewards. This prevents double taxation. What I mean by that is if you reported 1 ETH as $11,000 of taxable income when received, that $11,000 becomes your cost basis.

Calculating capital gains or loss

When selling your staking rewards, the formula is simple:

Sale price – Cost basis = Capital Gains (or Loss)

Example 1: Sell 1 ETH with a cost basis of $11,000 for $11,500. You report a $500 capital gain.

Example 2: Sell the same ETH for $10,200. You report an $800 capital loss.

Short-term vs long-term capital gains

The holding period matters. If you hold rewards for one year or less, the IRS treats the gain as short-term, taxed at ordinary income rates. If held for more than one year, you qualify for long-term capital gains treatment, which usually means lower tax rates. 

Long-term capital gains apply when you hold the asset more than 1 year before selling.

• 0% if your taxable income is modest (up to $47,000 for a single person, $94,000 for married couples filing together).
• 15% for most middle-income taxpayers ($47,026 to $518,900 for singles).
• 20% for high earners (over $518,900 single or $583,750 joint).

In practice, many people either sell quickly to lock in liquidity or compound by re-staking. Either way, it is important to track all the dates because the short-term versus long-term distinction can make a huge difference in your final tax bill.

The Jarrett v. United States case

One of the most important cases in staking tax history is Jarrett v. United States. The taxpayers argued that staking rewards should not be taxable income until sold, claiming they were new property created through PoS validation. This “new property” theory would have delayed taxation until the final sale.

But, this never came to be as the case was dismissed when the IRS refunded the Jarretts without setting precedent. In other words, no law was changed. Shortly after, the IRS doubled down in Revenue Ruling 2023-14, confirming that staking rewards are taxable income when you receive rewards and have dominion and control over them.

For investors, the safe approach is now clear: follow the IRS guidance and treat staking rewards as ordinary income when received, and recognize capital gains or loss upon the final sale.

Reporting your staking taxes

Step 1: Meticulous record-keeping

Every taxable event requires you to keep documentation. Track the date, amount, fair market value, and wallet or platform where the reward was received. Without these records, you risk underreporting taxable income and getting fined (or worse).

Step 2: Use crypto tax software

If you are staking across multiple platforms or wallets, using specialized crypto tax software is highly recommended. Tools like Koinly, CoinLedger, or ZenLedger can import your data, calculate cost basis for you, and automatically generate IRS-ready forms for free.

Step 3: Fill out the correct tax forms

• Ordinary income: You report these staking rewards as “other income” on Schedule 1. If you are running a validator or treating staking as a business, use Schedule C, which will trigger a self-employment tax.
• Capital gains or loss: Use Form 8949 to list each transaction, then summarize the same info on Schedule D. The short-term or long-term classification applies here.
• New for 2025: Form 1099-DA will become part of the tax process. Brokers must issue this form to report digital asset sales starting January 1, 2025. Cost basis reporting will phase in starting in 2026. Some exchanges may still issue Form 1099-MISC for staking rewards, which will work as well.

The thing I want to mention here is that reporting requirements are constantly expanding. Even if you do not receive a tax form from anybody, you are still responsible for reporting all your taxable income and gains.

Practical questions every investor asks

What about taxes for DeFi and liquidity pool rewards?

DeFi platforms and liquidity pools often pay rewards in multiple tokens, sometimes auto-compounded through smart contracts. The IRS has not carved out a separate rule for these, so the same principle applies: rewards are taxable as ordinary income at market value when you receive the rewards. They are also subject to capital gains or loss when sold (disposed). The difficult part will be juggling multiple cost basis calculations with different tokens.

What if I re-stake or compound my rewards immediately?

Even if you send rewards back into the protocol the moment they hit your wallet, they are still taxable income when received. The IRS considers you to have dominion and control at that moment, so the taxable event already occurred. Compounding may grow your portfolio, but it does not bypass your reporting obligations.

How are staking fees and gas costs treated?

Transaction fees and gas costs can be deducted from the cost basis or added to the selling price when calculating capital gains. If you operate as a business validator, some of your other expenses may also be deductible. For casual investors, fees are usually calculated in a way to reduce the net proceeds.

What if my rewards were frozen or lost?

If the tokens were credited and you had control, they are considered taxable income even if you later lose access through a collapse or a hack. If the rewards were never made available to you, then no taxable event occurred. Documenting your control, or lack of it, is the main thing if you ever need to explain “events beyond your control” to the IRS.

Here’s what typically counts as acceptable proof:

• Blockchain records. Screenshots of transaction IDs from a block explorer showing if rewards were actually transferred to your wallet (you had control) or not (no control).
• Exchange or platform statements. This is your account history showing whether rewards were credited and accessible. If tokens were only displayed as “pending” but never withdrawable, that distinction matters.
• Communication from the exchange/protocol. Official notices of freezes, hacks, or collapses showing why assets were never available to you.
• Independent third-party reports. These include news articles, bankruptcy filings, or forensic reports that confirm the platform failure and loss of access.

Key lessons for staying compliant

In reality, the tax for proof-of-stake rewards is not that hard to get used to. Under current IRS laws, staking rewards are taxable as ordinary income when you receive rewards and have “dominion and control”. 

Selling those same tokens later triggers a separate calculation for capital gains (or loss), with cost basis preventing double taxation.

To stay tax compliant when staking crypto follow these main rules:

• Keep meticulous records of every staking reward, including date, amount, and fair market value.
• Understand that each reward creates taxable income at receipt and sale (capital gains).
• Use crypto tax software to simplify record-keeping and ensure accurate filings (free ones mentioned above).
• Watch for the rollout of Form 1099-DA in 2025 and expanded cost basis reporting in 2026.

Until some new legislation changes the rules, the safest move for US investors is to follow existing guidance outlined above. 

Outside the US, staking taxes are far from easy to understand. In the United Kingdom, rewards are often treated as miscellaneous income when received, and later taxed again as capital gains when sold. Germany takes a different approach, if you hold for more than one year, the gain is tax-free. 

Singapore stands out in another way, individual investors pay 0% on capital gains but staking rewards or business activity can be taxed as ordinary income up to 22%.

The key point here is that tax authorities worldwide are tightening reporting standards, with many countries moving toward automatic information sharing and stricter oversight of digital transactions. 

For average investors, this means that flying under the radar is becoming less realistic each year. Staying tax compliant is not only about avoiding penalties, it is also about future-proofing your crypto holdings as regulators close the gaps and increase their oversight.