Crypto Staking Taxes: In-Depth Guide

Crypto staking involves participating in a blockchain network by holding a specific cryptocurrency in a digital wallet to support the network's operations. 

In the past few years, staking has emerged as a popular long-term investment strategy, but it also introduced a new layer of complexity to the tax code, as was the case with crypto mining. 

Understanding the tax implications of crypto staking is crucial for anyone involved in this space, which is why our guide aims to provide a comprehensive overview of how staking is taxed in 2024, how to report your earnings, and what you need to know about DeFi staking taxes.

How is Staking Taxed?

In 2023, the IRS released guidelines stating that staking rewards are considered income at the time of receipt. 

This means that the moment you receive a staking reward, it becomes a taxable event. 

The amount is taxed as ordinary income at your marginal tax rate. 

You are required to report the fair market value of the tokens at the time you received them, and not a day later.

When to Recognize Income from Staking Rewards

The concept of 'dominion and control' plays a crucial role in determining when to recognize income from staking rewards. 

Tax experts believe that staking rewards are considered 'received' when investors have dominion and control over their coins. 

This means you recognize income regardless of whether the coins are in your personal wallet or are in the hands of a third-party.

Staking Award Taxes

When you eventually sell the staked tokens, you will incur a capital gain or loss depending on how the price of your staking rewards changed since you originally received them. 

The rate will depend on how long you've held the tokens:

• Short-term Capital Gains: If you sell the tokens within a year of receiving them, any gain will be considered short-term and will be taxed at your ordinary income tax rate.
• Long-term Capital Gains: If you hold the tokens for more than a year, you'll benefit from a lower tax rate on any gains, which could be 0%, 15%, or 20%, depending on your income.

DeFi Staking Taxes

In most cases, DeFi staking income is subject to income tax. 

However, some DeFi staking protocols leverage crypto-to-crypto swaps to allow users to stake/unstake crypto. 

These transactions may be subject to capital gains tax, like other crypto-to-crypto swaps.

How to Report Crypto Staking Rewards on Taxes

Here are some basic guidelines for you to consider when reporting crypto staking rewards:

• Record Keeping. Maintain a detailed record of all your staking activities, including the date, the type of coin, and the fair market value at the time of receipt.

• Form 1040. Individual taxpayers can report their staking rewards as 'Other Income' on Form 1040 Schedule 1.

• Form 8949 & Schedule D. When you sell your staked tokens, report the capital gains or losses on Form 8949 and summarize them on Schedule D.

How to Calculate Staking Rewards?

Calculating your staking rewards for tax purposes involves determining the fair market value of the tokens at the time they are received. 

Due to the complexity of the calculations, you can also use some of the cryptocurrency tax software options can help you determine this value over time.

Staking Pools and Their Tax Implications

A staking pool allows investors to pool together their staked crypto to increase their chances of being selected as a validator and earning staking rewards.

Earning staking rewards through a staking pool should be considered income at receipt, even if you do not withdraw your rewards.

Bottom Line

Staking offers a promising way to earn income in the crypto world, but it comes with its own set of tax obligations. Proper understanding and reporting are crucial to avoid any penalties.