IRS Says Crypto Staking is Taxable: What You Need to Know

The IRS has officially clarified the tax treatment of cryptocurrency staking rewards. In Revenue Ruling 2023-14, the agency ruled that staking rewards must be included in gross income for the year the taxpayer gains dominion and control over the awarded cryptocurrency. This ruling sheds light on a previously gray area of crypto taxation and has significant implications for investors, especially high earners and wealthy individuals involved in staking.

What is Crypto Staking?

Crypto staking involves pledging cryptocurrency to a blockchain network to help validate transactions and maintain the network’s security and functionality. In return, participants receive staking rewards—typically the native token of the blockchain.

Types of Staking:

1. Illiquid Staking:

• Tokens are staked with a validator, earning an Annual Percentage Rate (APR) on the investment.

• The original crypto remains tied up and cannot be accessed until unstaking occurs, at which point the user retrieves their initial investment plus the APR.

2. Liquid Staking:

• Tokens are staked, but the user receives liquid staking tokens as a representation of the underlying staked crypto.

• These liquid tokens can be traded or used as collateral while the original crypto remains staked.

Both methods generate staking rewards, which are now explicitly taxable under the IRS ruling.

Staking Rewards: The IRS’s New Guidance

The IRS’s latest ruling establishes that:

• When Are Rewards Taxed?

Staking rewards must be included in taxable income the moment the taxpayer gains dominion and control over them.

• Dominion and control mean the taxpayer can sell or transfer the tokens freely.

• How Are Rewards Valued?

The fair market value of the staking rewards on the date they become accessible determines the taxable income.

• Who Does This Apply To?

The ruling applies to both direct participation in proof-of-stake blockchains and staking via exchanges.

This guidance extends to both liquid and illiquid staking arrangements, meaning that whether tokens are immediately tradable or locked up, their value at the time of control is subject to taxation.

Why This Matters for High Earners

For high-income crypto investors, this ruling underscores the importance of understanding taxable events in crypto investments. Since staking rewards are taxed at the fair market value upon receipt, even rewards that are not immediately liquid could result in significant tax liabilities.

For example:

Scenario: An investor stakes $100,000 worth of tokens and earns staking rewards worth $10,000.

Taxable Income: The $10,000 in rewards is taxed as ordinary income in the year the investor gains control, potentially pushing the investor into a higher tax bracket.

Given the volatile nature of crypto, this tax obligation remains even if the value of the rewards decreases before they are sold or used.

How to Manage Tax Liabilities from Crypto Staking

Track Rewards Carefully:

Maintain records of staking rewards, including the dates they were received and their fair market values.

2. Plan for Taxes:

Calculate the potential tax liability on staking rewards and set aside funds to cover it.

3. Work with a Tax Advisor:

Seek guidance from a CPA experienced in crypto to ensure compliance and identify strategies for minimizing liabilities.

4. Explore Alternative Investments:

High-income earners should consider diversifying portfolios to include tax-advantaged options that offset the liabilities from staking income.

Using Oil & Gas Investments to Offset Income

One effective way to manage taxable income is through oil and gas direct investments. These investments offer unique tax benefits under IRS rules, including:

• Intangible Drilling Costs (IDCs):

Investors can deduct up to 90% of the investment in the year it is made, directly offsetting active income.

• Depletion Allowances:

Passive income generated from oil and gas projects is further shielded from taxes through depletion allowances.

Example:

• Investment: $50,000 in a vetted oil and gas project.

• Tax Deduction: $45,000 (90% of the investment).

• Tax Savings: For someone in the 37% federal tax bracket, this equals $16,650 in federal tax savings, plus additional state savings.

Not only do these investments reduce immediate tax burdens, but they also offer long-term income opportunities. Platforms like Fieldvest connect accredited investors with vetted oil and gas projects, ensuring reliable partnerships.

Conclusion

The IRS’s new guidance on crypto staking highlights the importance of tax planning for high earners and wealthy investors. While staking rewards present an opportunity for passive income, they also introduce taxable events that require careful management. By diversifying with tax-advantaged investments like oil and gas, investors can mitigate tax liabilities and build a more balanced financial strategy.

To learn more about how oil and gas investments can offset income and maximize tax advantages, consider exploring platforms like Fieldvest for vetted opportunities. Smart tax planning starts with understanding the rules and leveraging strategies that work in your favor.