New Revenue Ruling on Staking Income


On August 1, 2023, the IRS issued a new Revenue Ruling (Rev. Rul. 2023-14) holding that income received from delegating tokens to a validator ("Staking Income") is taxable at the time the taxpayer has "dominion and control" over the newly received tokens.

No one I know thought that was a surprise.  Arguments that staked tokens were like self created intellectual property or agricultural produce (and therefore not taxable until sold) were theoretically possible (and certainly seem to apply to genesis block tokens held by founders), but they were always a stretch.  Arguments that tokens received from staking were like stock splits or simply inflationary (slicing the pizza into more pieces) denied Treasury's fundamental need to have a clear measurement date and benchmark.

The meaning of "Dominion and Control" is discussed in Rev. Rule 2019-24, which can be found here, in the context of hard forks, but if there ever was any doubt, the new ruling also states explicitly, "A has an accession to wealth as A gains dominion and control through A’s ability, as of this date, to sell, exchange, or otherwise dispose of the 2 units of M received as validation rewards."  At least that means that the taxpayer has taxable income only when he or she can sell the tokens (so the taxable event for locked tokens should be delayed).*

The ruling is silent on two other issues that are relevant:  (1) is there any argument that staking income is capital gain? and (2) what are the withholding tax consequences for staking income (e.g., if an investment partnership allocates staking income from a US based validator to a foreign partner?  It also does not say whether staking income might be UBTI or (perish the thought) "Effectively Connected with a US Trade or Business" ("ECI").  Generally, the view among the professionals I know is that staking income is ordinary, that it is FDAP (and so subject to withholding tax like dividends or royalties), and that it is not UBTI or ECI, but for now we'll have to rely on logic and not authority on those.


*    The specific facts of the example in the revenue ruling are pretty clear: "Transactions in M, a cryptocurrency, are validated by a proof-of-stake consensus mechanism. On Date 1, Taxpayer A, a cash-method taxpayer, owns 300 units of M. A stakes 200 of the units of M and validates a new block of transactions on the M blockchain, receiving 2 units of M as validation rewards. Pursuant to the M protocol, during a brief period ending on Date 2, A lacks the ability to sell, exchange, or otherwise dispose of any interest in the 2 units of M in any manner. The following day, on Date 3, A has the ability to sell, exchange, or otherwise dispose of the 2 units of M." [Emphasis added.]


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