Crypto Staking Taxes: How the IRS Taxes Your Staking Rewards

You're staking your Ethereum. Or Solana. Or Cardano. Every few days, new tokens appear in your wallet.

Free money, right?

Not quite. The IRS wants their cut.

The short answer: Staking rewards are taxed as ordinary income when you receive them, based on their fair market value at that moment. Then, if you sell them later at a different price, you'll owe capital gains tax on any additional profit. Yes, that means potential double taxation.

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What the IRS Says About Staking

In July 2023, the IRS issued Revenue Ruling 2023-14, finally clarifying how staking rewards are taxed:

"When a taxpayer stakes cryptocurrency and receives additional units of cryptocurrency as rewards... the fair market value of the validation rewards received is included in the taxpayer's gross income."

Translation: Staking rewards are income the moment you can access them.

This applies whether you:

• Stake directly to a blockchain (like running an Ethereum validator)
• Stake through an exchange (like Coinbase or Kraken)
• Use liquid staking protocols (like Lido or Rocket Pool)

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How Staking Rewards Are Taxed

Step 1: Income Tax When You Receive Rewards

Every time you receive staking rewards, you owe ordinary income tax on their fair market value at that moment.

Example:

• You earn 0.1 ETH in staking rewards
• ETH price at receipt: $3,000
• Taxable income: $300

If you're in the 24% tax bracket, you owe $72 in taxes—even if you haven't sold anything.

Step 2: Capital Gains Tax When You Sell

Later, when you sell your staking rewards, you'll owe capital gains tax on any price change since you received them.

Example (continuing):

• You later sell that 0.1 ETH when ETH is $4,000
• Sale proceeds: $400
• Cost basis: $300 (value when received)
• Capital gain: $100

If held over a year: 15% tax = $15 If held under a year: Taxed at ordinary rates = up to $37

The Math Gets Real

Let's say you're staking $50,000 worth of Ethereum with a 4% annual yield:

• Annual rewards: ~$2,000 worth of ETH
• At 24% tax bracket: $480 owed in income taxes
• Plus capital gains tax if ETH price rises before you sell

You're paying taxes on tokens you might not even sell for years.

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When Are Staking Rewards "Received"?

This is crucial: you owe taxes when you have "dominion and control" over your rewards—meaning you can freely withdraw, sell, or transfer them.

Clear Taxable Moments

• Exchange staking: When rewards are credited to your account and available for withdrawal
• Direct staking: When rewards appear in your wallet and can be transferred
• Liquid staking: When you receive liquid staking tokens (like stETH)

Gray Areas

Some situations create uncertainty:

Locked staking: If rewards are locked and you can't access them, you may be able to defer taxation until they unlock. (Consult a tax professional for your specific situation.)

Auto-compounding: Some protocols automatically restake your rewards. The IRS hasn't explicitly addressed this, but the conservative approach is to treat each compounding as a taxable event.

Slashing: If you lose staked tokens due to validator penalties, this may be deductible as a capital loss.

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Reporting Staking Income: The Forms

Schedule 1 (Form 1040)

Report staking rewards as "Other Income" on Schedule 1, Line 8z.

Write "Crypto Staking Rewards" in the description field.

Form 8949 and Schedule D

When you eventually sell your staking rewards, report the sale on Form 8949 and summarize on Schedule D.

Schedule C (If You're a Staking Business)

If staking is your trade or business (you run validators professionally, for example), report on Schedule C. This allows business expense deductions but subjects you to self-employment tax.

Most individual stakers should use Schedule 1, not Schedule C.

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Tracking Staking Rewards (The Hard Part)

Here's where staking taxes get complicated: tracking.

If you stake for a year, you might have hundreds of small reward payments, each received at a different price. You need to track:

• Date and time of each reward
• Amount received
• Fair market value at receipt
• Eventually: date sold and sale price

Manual Tracking

You can track manually with a spreadsheet, but it's tedious:

Date	Reward	Price	Value	Notes
1/15/2026	0.01 ETH	$3,100	$31	Coinbase staking
1/22/2026	0.01 ETH	$3,250	$32.50	Coinbase staking

Multiply this by 52 weeks (or more frequent payouts) and it becomes a project.

Crypto Tax Software

Tools like Koinly, CoinTracker, TokenTax, and ZenLedger can:

• Connect to exchanges and wallets
• Automatically identify staking rewards
• Calculate fair market value at each receipt
• Generate tax reports

For active stakers, these tools are worth the investment.

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Staking on Exchanges vs. Direct Staking

Exchange Staking (Coinbase, Kraken, etc.)

Pros:

• Exchange may send a 1099 (starting 2026)
• Easier record-keeping
• No technical setup

Cons:

• Lower yields (exchange takes a cut)
• Less control over your assets
• Exchange may report to IRS

Direct Staking / Liquid Staking

Pros:

• Higher yields
• Full control of assets
• Privacy (no 1099 issued)

Cons:

• You're responsible for tracking everything
• More complex tax situations
• Technical knowledge required

Important: "No 1099" doesn't mean "not taxable." You're still required to report all staking income regardless of whether you receive tax forms.

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Strategies to Minimize Staking Taxes

1. Hold Rewards for Long-Term Treatment

If you receive staking rewards and hold them for over a year before selling, any additional gains qualify for long-term capital gains rates (0-20% instead of up to 37%).

Example:

• Receive 0.5 ETH rewards in January 2026 (value: $1,500)
• Sell in February 2027 when ETH is $4,000 (value: $2,000)
• Income tax on $1,500 when received
• Long-term capital gains on $500 appreciation

2. Stake in Tax-Advantaged Accounts

Some self-directed IRAs and 401(k)s allow crypto investments. Staking within these accounts could defer or eliminate taxes on rewards.

Caveats:

• Complex setup
• Custodian requirements
• Contribution limits apply
• May not be worth it for small amounts

3. Harvest Losses to Offset Staking Income

If you have crypto losses, you can use up to $3,000 per year to offset ordinary income—including staking income.

4. Consider Your Staking Amount

If you're in a high tax bracket, the income tax on staking rewards adds up fast. Consider whether the after-tax yield is still attractive compared to other investments.

Example:

• 5% staking yield
• 37% marginal tax bracket
• After-tax yield: ~3.15%

A taxable bond fund might offer similar after-tax returns with less complexity.

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Common Staking Tax Mistakes

1. Not Reporting Because "I Didn't Sell"

Staking rewards are taxable when received, not when sold. Many investors get this wrong.

2. Using Wrong Fair Market Value

The value at the exact moment you receive rewards matters. Using daily averages or different timestamps can lead to errors.

3. Not Tracking Rewards Separately

Your staking rewards have a different cost basis than crypto you purchased. Mixing them up leads to incorrect gain calculations when you sell.

4. Ignoring Small Amounts

There's no minimum threshold. Even $10 in staking rewards is taxable income.

5. Treating All Protocols the Same

Different staking mechanisms have different tax implications. Liquid staking tokens, rebasing tokens, and traditional staking rewards may be treated differently.

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Future Changes to Watch

More IRS Guidance Expected

The IRS has been slow to address DeFi and staking nuances. Expect more guidance on:

• Liquid staking tokens
• Auto-compounding protocols
• Layer 2 staking
• Slashing and penalties

Exchange Reporting (1099-DA)

Starting 2026, exchanges will report staking rewards on the new Form 1099-DA. This means:

• Less anonymity
• IRS will know your staking income
• Mismatches between your return and 1099s will trigger audits

Potential Tax Law Changes

Congress has discussed various crypto tax changes. Staking might eventually receive different treatment—for better or worse.

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The Bottom Line

Staking rewards are taxable income. The IRS made this crystal clear in 2023, and enforcement is increasing.

The key points:

• Taxed as ordinary income when received
• Fair market value at receipt becomes your cost basis
• Capital gains apply when you eventually sell
• Track every single reward receipt
• Report on Schedule 1 and Form 8949

If you're staking significant amounts—especially across multiple protocols or chains—professional help can save you from costly mistakes. Crypto tax software plus a knowledgeable CPA is the winning combination.

Staking across multiple chains and not sure how to track it all? Let me help →

— Krystal Le, CPA

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LeCPA helps DFW crypto investors navigate staking taxes and stay compliant.

Sources:

• IRS Revenue Ruling 2023-14
• BDO: IRS Clarifies Crypto Staking Rewards
• CoinLedger: How Do Staking Taxes Work