Don’t overlook tax on crypto staking rewards: Kiplinger Tax Letter
The IRS has issued guidance on crypto staking rewards, but broker reporting on digital asset sales won’t start until 2025.
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A man asking a court to rule on the taxation of staking rewards got bad news. A federal appeals court tosses his case. He filed a refund claim alleging that token rewards he got from staking cryptocurrency are created property that is not taxed on receipt but on disposition. The IRS first disallowed his refund claim. But after he filed a lawsuit, seeking a return of his money, the IRS sent him a refund check.
Last year, a trial court dismissed the case without ruling on the merits. The Sixth Circuit Court of Appeals has now affirmed the lower court’s decision. The man filed a refund suit, and the IRS later paid him in full. That makes the case moot. It doesn’t matter that the taxpayer didn’t cash the refund check (Jarrett, 6th Cir.).
Meanwhile, while the above court case was going on, the IRS issued guidance on the taxation of staking rewards in July. When one stakes crypto native to a proof-of-stake blockchain and receives additional crypto units or tokens as validation rewards, the fair market value of those token awards is gross income in the year the taxpayer has dominion and control over the tokens (Rev. Rul. 2023-14).
In other cryptocurrency tax news, brokers get guidance on how to comply with reporting rules on digital assets. A 2021 law requires brokers to report the sales price, tax basis and other information on digital asset trades. The rules were scheduled to first take effect for digital assets acquired on or after Jan. 1, 2023, but the IRS previously delayed the reporting obligation. Proposed regulations issued by the IRS address a multitude of topics:
- Reportable digital assets
- Brokers required to report under the rules (the definition of broker for this purpose is broad)
- Types of sales subject to reporting
- Information to be reported to the IRS and the taxpayer
- Gross proceeds in digital asset transactions
- And much more
Brokers will use new IRS Form 1099-DA to report this information. Brokers have a couple of years to prepare for this. Under the proposed regulations, brokers must report gross proceeds from digital asset sales taking place in 2025 or later. That means you won’t receive a 1099-DA from your broker until early 2026. Reporting of tax basis and character of gain begins with 1099-DAs sent out in 2027.