New IRS Rules May Impact Crypto Staking Income

New rules by the Internal Revenue Service (IRS) may have important implications for those who earn revenue through staking cryptocurrency, one tax lawyer warned this week.

According to the Tax Law Offices of David W. Klasing, IRS Revenue Ruling 2023-14 states that staking rewards will now be considered gross income. These rewards must be included in income calculations and could affect how much one forks over to Uncle Sam.

“In essence, this new ruling establishes that cryptocurrency staking rewards and various other forms of income, such as money, property, and services, are now classified as gross income,” the firm said in a statement. “Consequently, these earnings must be reported in the year they are received. This rule applies to all taxpayers, regardless of whether they stake digital assets directly or through centralized cryptocurrency exchanges.”

Staking, an aspect of proof-of-stake blockchains, sees participants lock up their cryptocurrency holdings as collateral to support network operations. This process helps secure the blockchain; in return, participants receive rewards through newly minted tokens. According to the IRS, the fair market value of these rewards must be included in the taxpayer’s gross income for the taxable year when they gain control over the rewards.

The ruling is based on the concept of “dominion and control,” the firm added. Dominion refers to the level of control or ownership a person or entity exercises over specific assets or income. The IRS uses this principle to determine tax liability.

When calculating their taxable income, taxpayers must determine the fair market value of the cryptocurrency rewards at receipt. This number is added to their annual income for that particular tax year.

“It’s important to note that this ruling aligns cryptocurrency staking rewards with the taxation of Bitcoin mining rewards, reinforcing the assumption that consensus-layer staking rewards are subject to similar tax treatment.” The firm added.

Some believe that the taxation of newly minted tokens received as staking rewards should be deferred until they are sold. They cite industries where newly extracted resources are taxed only upon sale.

Ruling 2023-14 debuts at a time when regulatory scrutiny over crypto has intensified, fuelled by numerous scandals.

American taxpayers should look to IRS Form 8949. It is designed to compute the profit or loss incurred from their digital asset transactions. These assets must then be documented on either Schedule D (Form 1040) or Form 709. Form 1040 addresses capital gains or losses, while Form 709 addresses digital assets obtained through gifting or awards.

Employees who receive digital assets in their compensation package must disclose their value as part of their wages.

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