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Legislation: Cryptocurrency staking rewards are taxed at the time of sale | McGlinchey Stafford
Proposed federal legislation would shift the time of taxation for rewards received from staking cryptocurrency and other digital assets to the time of sale. IRS guidelines currently provide this Wagering prizes are taxed when the taxpayer acquires dominion and control over the compensation; that is, when the taxpayer has the ability to sell, exchange or otherwise dispose of the cryptocurrency.
Cryptocurrency Staking Overview
In general, cryptocurrency staking occurs when a cryptocurrency owner pledges all or part of their cryptocurrency to help validate transactions on the blockchain. The incentive for staking is to earn validation rewards, which typically consist of one or more newly created units of a specific blockchain’s native cryptocurrency.
Complications for cash taxpayers
Last summer, the IRS released Revenue Decision 2023-14, which addresses the tax treatment of cryptocurrency staking rewards. The problem with the IRS guidelines is that it requires cash taxpayers to pay taxes on validation prizes before the validation prizes are sold. For example, a taxpayer may receive a validation award in 2024 but not sell it until 2025. If the taxpayer has the right to sell the validation award in 2024, he or she must determine the fair market value at the time he or she becomes entitled to to sell it. and pay taxes in 2024.
While the IRS guidelines may be consistent with general tax policy, they require taxpayers to pay taxes before receiving any gain they may realize from the sale of the validation prize. Additionally, the value of the validation premium may decline between the time the taxpayer has the right to sell it and the time it is actually sold. This could give rise to a tax loss, but the loss may be of little consolation for having had to pay tax in the previous year.
Uncertainty and next steps
The proposed legislation currently does not address important tax issues related to wagering income, such as the characterization of the income, whether or not the wagering constitutes a trade or business, and whether non-U.S. persons/entities may be subject to income taxation in the United States. United on certain episodes. income.
The fate of the proposed legislation is unclear and it may never be implemented. For now, taxpayers should follow the guidelines in Revenue Ruling 2023-14.