To that end, the U.S. statutory agency issued a new rule directing any individual who engaged in cryptocurrency “staking” to include the gross income from the activity in their tax filings. Staking, explains investor resource Investopedia, is a process allowing crypto holders to use their funds as collateral in support of blockchain network operations in exchange for some form of a reward. As such, it has become a popular way for holders to generate passive income in support of the “security and decentralization of blockchain networks.” Staking platforms can return as much as 20% or more each year, notes Investopedia.
The IRS guidance explains how to value taxable income in instances when the reward for staking is, in fact, additional crypto assets. “If a cash-method taxpayer stakes cryptocurrency native to a proof-of-stake blockchain and receives additional units of cryptocurrency as rewards when validation occurs, the fair market value of the validation rewards received is included in the taxpayer’s gross income in the taxable year in which the taxpayer gains dominion and control over the validation rewards,” reads information from the IRS. “The fair market value is determined as of the date and time the taxpayer gains dominion and control over the validation rewards.”
Additionally, the same taxable principles apply should the assets be staked through a cryptocurrency exchange that offers additional units of the asset as a result of its validation, explains the IRS.
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Federal regulators and enforcement agencies in the U.S. have taken a notable interest in cryptocurrency staking in recent months as it has gained traction among investors. Notably, the U.S. Securities and Exchange Commission filed a lawsuit against Kraken earlier this year alleging it failed to properly register its offering and sales of its “crypto asset staking-as-a-service program.”
“In case after case, we’ve seen the consequences when individuals and businesses tout and offer crypto investments outside of the protections provided by the federal securities laws: investors lack the disclosures they deserve and are harmed when they don’t receive them,” said Gurbir S. Grewal, director of the SEC’s Division of Enforcement. “Today, we take another step in protecting retail investors by shutting down this unregistered crypto staking program, through which Kraken not only offered investors outsized returns untethered to any economic realities, but also retained the right to pay them no returns at all.”
According to the SEC, Kraken agreed to stop selling securities through its staking services and paid $30 million in “disgorgement, prejudgment interest, and civil penalties.”
