The landscape of cryptocurrency taxation has recently seen notable developments, notably with the IRS Revenue Ruling 2023-14 shedding light on the treatment of rewards accrued from staking cryptocurrency.
For those acquainted with the intricate world of digital asset taxation, this ruling’s position is consistent with the stance the IRS has adopted, dating back at least to the Jarrett case. This ruling serves to formalize the position that rewards gained from staking should be recognized as part of a taxpayer’s gross income upon receipt.
The Jarrett Case
The underlying legal context stems from the Jarrett case, wherein the contention was whether rewards earned from staking cryptocurrency should be subjected to taxation at the point of receipt or only upon their subsequent sale. The IRS issued a refund to the Jarretts, ultimately leading to the dismissal of the case. While some within the cryptocurrency community celebrated this as a triumph for stakers, those grounded in foundational tax principles remained circumspect.
IRS Notice 2014-21 has long established that cryptocurrency trades are to be treated as property transactions and reported akin to capital gains on Schedule D. However, it is imperative to underscore that staking differs fundamentally from trading. Staking, in essence, involves lending cryptocurrency to the blockchain for the validation of transactions within the “proof-of-stake” framework.
The Jarretts’ analogy likening their staked tokens to ingredients used in baking bread holds relevance here. Their argument revolved around the notion that similar to how bread is taxed upon its sale, their newly minted cryptocurrency should follow the same principle. Nevertheless, a crucial distinction is that while their staked cryptocurrency indeed contributes to the creation of new assets, they themselves are not the creators; the blockchain itself undertakes this role.
Engaging in a discourse with cryptocurrency taxation expert Matt Metras, an enrolled agent based in Rochester, New York, highlighted a salient perspective. Metras noted, “They were being compensated for their services of maintaining the blockchain by agreeing that their property could be used as collateral.” This perspective underscores that the rewards derived from staking are analogous to rental income in the realm of taxation.
Moving forward, a closer examination of IRS Revenue Ruling 2023-14 is warranted. The ruling references Section 61 of the Internal Revenue Code, which encompasses gross income deriving from various sources unless specific exemptions apply. Notably, no such exception exists for staking cryptocurrency.
The ruling aligns staking rewards with an increase in wealth, realized and under the complete dominion of the taxpayer—an alignment deeply rooted in legal precedent.
The ruling stipulates that staking rewards must be included in a taxpayer’s gross income upon receipt and upon achieving the right to exercise control over them. This signifies that these rewards should be recognized as part of the taxpayer’s income at the point of potential sale rather than the moment of the sale itself.
Additionally, the ruling indicates that the gross income reported on Form 1040 should mirror the fair market value of the rewarded cryptocurrency as of the date and time the taxpayer obtains control over it.
Delving into expert perspectives, Matt Foreman, a partner at Falcon Rappaport & Berkman, LLP in New York City, conveyed insights on the ruling. Foreman noted, “I think RR 2023-14 does little more than confirm the IRS’s position and provide support for when they seek penalties going forward.”
Foreman also acknowledged the ruling’s acknowledgment of outstanding issues, such as gas fees and matters arising under IRC Section 83, which pertains to property received in exchange for services. This acknowledgment is interpreted as an indicator of forthcoming IRS guidance to address these aspects.
The IRS Revenue Ruling 2023-14 stands as a significant development in the realm of cryptocurrency taxation, serving to provide clarity and a structured framework for taxation of rewards from staking.
It emphasizes the importance of staying attuned to evolving IRS perspectives while also advocating for consultation with tax professionals to navigate complicated and continually evolving with tax professionals to navigate.
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