Staking Rewards and IRS Taxation: When Are They Income?

The IRS says staking rewards are taxable income when received. A recent court case may have changed that — here's the current landscape.

Proof-of-stake blockchains reward validators with new tokens for securing the network. The IRS treats these rewards as ordinary income at fair market value upon receipt. But a 2024 court ruling in Jarrett v. United States has introduced uncertainty about whether staking rewards should be taxed on receipt or only upon sale.

The IRS Position

The IRS takes the position that staking rewards are income when you gain dominion and control over them. Under Revenue Ruling 2023-14, staking rewards for cash-method taxpayers are included in gross income in the taxable year in which the taxpayer gains dominion and control. This means the moment your staking reward appears in your wallet, you owe income tax on its fair market value — regardless of whether you sell it.

The Jarrett Case

Joshua and Jessica Jarrett argued that staking rewards are newly created property — like a baker creating bread — and should not be taxed until sold, similar to how a manufacturer is not taxed on inventory until it is sold. The IRS refunded their taxes but the Jarretts pursued the case to establish precedent. The case raised fundamental questions about the nature of block rewards that remain unresolved as of this writing.

Practical Impact

Until the law is settled, the conservative approach is to report staking rewards as income when received. However, taxpayers who take the Jarrett position and treat staking rewards as created property may have a reasonable basis defense against penalties if the IRS disagrees. The key is consistency and documentation — whatever position you take, apply it uniformly and be prepared to defend it.

Valuation

Staking rewards received continuously — as with validators on Ethereum or Solana — require valuation at the moment of receipt. For practical purposes, daily aggregation at the closing price on a major exchange is the most common approach. Software tools automate this process by tracking wallet inflows and matching them to historical price data.

Getting Compliant