Staking cryptocurrencies to earn rewards is becoming an increasingly popular method for investors to grow their crypto holdings. However, properly accounting for and reporting staking rewards can be complicated from a tax and accounting perspective.
This comprehensive guide covers everything crypto investors need to know about handling staking rewards, including:
What are Crypto Staking Rewards?
Cryptocurrency staking involves temporarily locking up crypto holdings in order to participate in transaction validations and maintain the security of a blockchain network. In exchange, stakers earn rewards, typically in the form of newly minted tokens or a portion of network transaction fees.
Some examples of crypto staking rewards include:
- Newly created tokens like Tezos or Cosmos ATOM tokens
- Network transaction or gas fees like on Ethereum 2.0
- Governance and voting rights to guide blockchain development
- Increased liquidity pool tokens from yield farming protocols
The most popular staking cryptocurrencies include Polkadot (DOT), Cardano (ADA), Solana (SOL), AVAX, and popular stablecoins like Binance USD.
How to Value Staking Rewards
Valuing crypto staking rewards can be challenging, especially for newly created governance and utility tokens with low liquidity. While fiat cash rewards have an easily determined dollar value, staking tokens must be converted to USD to ascertain tax and accounting implications.
The two main approaches to valuing staking token rewards are:
- Fair Market Value
Using reputable crypto price feeds and DEXs to find token prices at the time rewards were received.
- Income Method
Calculate the value when rewards were accrued based on the dollar amount invested divided by the number of tokens earned.
Issues can arise when using the income method for low liquidity and newly created tokens without a transparent pricing source or market transactions. The fair market value approach is generally recommended but also has limitations around finding accurate prices for niche tokens.
Tax Implications of Staking Rewards
How staking rewards are taxed depends on whether rewards are classified as capital gains or ordinary miscellaneous income by tax authorities.
In the United States, the IRS treats staking rewards, including newly minted tokens, as taxable income rather than capital gains. This means rewards must be reported and taxes paid every year instead of only when rewards get sold.
Other countries like Germany also treat staking as a taxable event but consider rewards as capital gains only upon the sale or trading of rewards.
Taxes owed will depend on an individual’s tax bracket for their ordinary income or capital gains tax rate. Proper documentation around reward valuation and records of any rewards sold is essential to calculate taxes owed each year.
Reporting Staking Rewards on Tax Returns
For U.S. crypto investors, all staking rewards must be reported annually as part of miscellaneous income on Form 1040 Schedule 1. Required documents include:
- Form 1040 Schedule 1 – To report annual ordinary staking income
- Form 8949 – For any rewards sold to record capital gains
- Form 1099-MISC – If earned over $600 from a single staking provider
The full reporting steps for stakers are:
- Value Rewards – At time earned using fair market valuation
- Record Income – Keep totals for annual income tax reporting
- Form 8949 – If any sales, record proceeds and basis
- Form 1099-MISC – Attach for large single entity rewards
- Report Income – Form 1040 Schedule 1 with tax software
Example Staking Income Reporting
|Staking Income Earned
|Form 1040 Schedule 1 Line 8z
|Taxes Owed (24% bracket)
Accounting Treatment of Staking Rewards
From an accounting perspective, staking rewards should be recorded on financial statements when earned regardless of price volatility or liquidity challenges in valuing new tokens.
Under U.S. GAAP accounting rules, income should be accrued with staking rewards recorded as a noncash investing activity under the Statement of Cash Flows similar to stock dividends.
Per IFRS accounting standards, staking income is recorded upon receipt as a non-cash transaction. Periodic valuation is required using consistent methodologies that follow standards for fair value or impairment accounting.
Both GAAP and IFRS require detailed disclosures on valuation methodologies in financial statement notes to provide investors transparency on reward recognition policies and income accrual estimates, especially concerning illiquid staking tokens.
Guidelines for Tracking & Recordkeeping
Since staking rewards are fully taxable as income, investors must keep detailed records of all rewards received and any associated sales or trading activity. Here are some best practices to follow:
- Use crypto tax software to directly connect wallets and track rewards
- Maintain monthly reports with income by token and fair market value
- Record sales proceeds and original basis for capital gains reporting
- Retain copies of staking reward transactions and token valuations
- Keep Form 1099-MISC documents from staking entities
As part of monthly reconciliation controls, staking income totals should tie to supporting documentation from connected wallets to avoid missing income. Failing to report staking rewards can result in penalties for underreported income or tax notices for unexplained activity.
Key Takeaways for Crypto Investors
- Staking rewards constitute taxable income, not capital gains (for U.S. taxpayers)
- Rewards must be tracked and valued at fair market price when earned
- Detailed reporting across Form 8949, Form 1099-MISC, and Form 1040 Schedule 1 is required
- From an accounting perspective, rewards follow GAAP or IFRS income recognition standards
- Consistent documentation for reward valuation and transactions is critical
Understanding the tax and accounting implications of crypto staking enables investors to properly report income and remain compliant. However, with many open questions around reporting requirements, working with a tax professional or crypto-savvy accountant is strongly recommended, especially for active stakers operating across multiple platforms and protocols.
Common Questions on Staking Rewards Taxes
Staking and taxes is still a complex, evolving area. Here we answer some common questions investors have around reporting and paying taxes on rewards:
Are staking rewards taxed when earned or when sold?
Unlike capital gains, staking rewards are taxed as ordinary income when earned. Rewards do not need to be sold before triggering a tax liability.
What if I didn’t sell any staking rewards last year?
All earned staking rewards must be reported each year. Taxes are owed annually on the dollar value of rewards even if unsold based on ordinary income tax rates.
Are taxes higher on staking compared to capital gains rates?
Yes, ordinary tax rates on staking income are typically higher than the special capital gains rates from selling rewards. Short-term capital gains tax rates reach 37% compared to 40.8% as the top ordinary tax bracket.
Can I deduct expenses to offset my staking rewards income?
No, under guidance from the IRS, investors cannot deduct any direct expenses related to staking like hardware costs or electricity fees. Some indirect fees paid may be deductible, but allocation is complex.
Do I need to file Form 1099-MISC for staking income?
You must file Form-1099 MISC if you earned over $600 in gross rewards from any single US-based staking provider. Foreign staking platforms do not issue 1099 forms.
Does staking income impact my tax bracket for other income?
Yes, your ordinary income from wages, interest, dividends gets lumped with staking rewards, so large amounts can push you into a higher tax bracket, impacting taxes owed on other income.
Tax Reporting Scenarios for Staking Investors
Let’s walk through some example tax situations to illustrate the reporting requirements and tax calculations:
Example 1: Solely Earning Rewards
- Staked 500 ATOM tokens on Cosmos Network
- Earned $5,000 in rewards across tokens like OSMO
- Did not sell any rewards in tax year
- No proceeds to report cap gains
- Value rewards at FMV when earned ($5,000)
- Record ordinary income tax liability
- Report $5,000 on Form 1040 Schedule 1 Line 8z
Example 2: Earning & Selling Rewards
- Staked Ethereum as a validator
- Acquired 100 ETH in rewards worth $150 each or $15,000
- Sold 50 ETH rewards for $12,000 later in the year
- Mark $15,000 as ordinary income when earned
- Form 8949: $6,000 proceeds with $7,500 basis
- Report $15,000 income + $6,000 capital gain
Example 3: Delegated Staking Position
- Delegated AVAX tokens to a staking pool
- Received 750 ANKR tokens as liquidity rewards worth $2,250
- Held ANKR but no trades made
- Report $2,250 as ordinary staking income
- List ANKR tokens for basis tracking if sold later
As these examples illustrate, tracking basis on rewarded tokens is crucial even with no immediate sales for future capital gains reporting.
Crypto Staking Resources
Further guidance for crypto investors on taxes:
- Official IRS Guidance Cryptocurrency Tax FAQs
- AICPA Crypto Tax Resource Page for CPAs
- Investopedia Crypto Staking Explainer Video for Beginners
- CoinTracking Blog on the Tax Implications of Staking
I hope this guide has provided a full overview of the intricacies involved with accounting for crypto staking rewards from a tax reporting and financial accounting perspective. Please let me know if you have any other questions!