Are staking rewards taxable? Crypto staking income is taxed, but taxation details depend on the jurisdiction and the respective tax legislation. The crypto industry is still young, so in most countries its regulation is rather ambiguous. With all the willingness to pay taxes, the user may still face many questions, e.g., when to pay - at the time of receiving the staking income or at the time of selling rewards? How to calculate taxes? How to actually pay them? And so on.
Let's take a closer look at the nuances of staking income taxation in different countries.
What is staking?
There are two types of staking, which sometimes leads to terminological confusion. There is cryptocurrency staking, similar in purpose to cryptocurrency mining. It can be called PoS staking, since this type of staking is available in PoS protocols, for example, in Ethereum after The Merge. And there is the staking of crypto assets in DeFi projects, for example, the staking of cryptocurrencies or tokens in lending protocols, liquidity pools, or in projects that attract funds for their development. Let’s call this staking type DeFi staking.
PoS staking is the blocking of cryptocurrencies on the network in order to participate in the process of confirming network transactions (validation) for a fee. PoS staking emerged as an alternative to PoW mining, and, unlike it, it does not require physical mining power. By PoS staking of cryptocurrencies, you contribute your share to the staking pool, and the higher it is, the more likely it is that the system will reward you.
DeFi staking is the blocking of cryptocurrencies or tokens in various DeFi protocols and projects for a fee. DeFi staking is necessary to create liquidity, i.e., on decentralized exchanges, where the larger the liquidity pool, the less impact the transaction volume has on prices, in other words, it ensures fair market pricing.
What is a staking reward?
What are crypto staking rewards? A staking reward is a reward from the platform that you receive for the crypto assets you provide to it.
In PoS staking, the system selects validators and pays them rewards. Each blockchain has its own rules for choosing a recipient, the amount and frequency of payments. Rewards are paid out in the corresponding blockchain cryptocurrency (native cryptocurrency). As in mining, users combine their assets in a pool and receive rewards in proportion to their share.
In DeFi staking, funds are attracted at a certain percentage. Depending on the platform, crypto assets can be blocked for a specific period, or with the option of withdrawal at any time. Rewards can be paid out daily, or with a different frequency, or simultaneously with fund withdrawal.
Anyway, any staking reward is considered income, and the main question is how to pay the related taxes.
Are staking rewards taxable?
In general, the answer is yes, but it all depends on your jurisdiction. As you know, the devil is in the details, and tax legislation is one of the best and perhaps the most fertile places for the devil to manifest all his sophistication and imminence. However, the last word still remains with the person.
So, first of all, you can engage in staking directly or through a third-party service. By PoS staking, you can independently launch a decentralized network node, or you can work indirectly through a third party if you don’t have the required resources, such as knowledge, funds or desire. In some countries, even this fact may be important for calculating the tax.
It is logical to assume that receiving a staking reward is subject to income tax, and it remains to find out the reward’s fair market value (FMV). At the same time, it is not a fact that you will immediately sell the coins received as a staking reward, but will dispose of them at your discretion in some other way and earn even more. In this case, you will most likely have to pay the capital gains tax (CGT).
As you can see, the answer “yes” does not always provide complete clarity, but becomes a reason for new questions and answers.
How is crypto staking taxed?
How are crypto staking rewards taxed? The transaction of crypto asset staking is not a taxable event in most cases, since you are actually moving funds between your wallets. However, the fees paid in connection with this transaction may well be added to the asset value, that is, to reduce the tax burden. This is another very subtle point that depends on the specific tax legislation and tax calculation methods.
Getting a reward for staking is definitely a taxable event. Let's look at how it’s interpreted in some countries:
How is crypto staking taxed in the USA?
The IRS (Internal Revenue Service) has not yet provided any specific instructions regarding taxes on staking, however, there is a Document concerning cryptocurrency mining. Extrapolating its contents, we can assume that the staking taxation principles are the same. Most experts are inclined to believe that, as mentioned above, staking should be subject not only to income tax when receiving rewards, but also to capital gains tax when selling crypto assets.
How is crypto staking taxed in Canada?
The CRA (Canadian Revenue Agency) does not offer specific recommendations, either, so the approaches to the mining and staking taxation are very similar in Canada and the USA. Just like in the USA, there are differences between the taxation of staking for individuals and legal entities (See FS-2007-18, April 2007, Business or Hobby?). One way or another, when receiving staking rewards, you have to pay income tax in Canadian dollars upon receipt and capital gains tax on the day of sale. The cost base of the rewards received is fairly valued at zero, since these coins were not purchased by you. Details regarding cryptocurrency taxation in Canada can be found here.
How is crypto staking taxed in the United Kingdom?
HMRC (His Majesty's Revenue and Customs) actually equates staking to mining, offering the following manual that was updated at the end of 2022. Here, it is also important whether your actions are a business or a hobby.
How is crypto staking taxed in Australia?
The ATO (Australian Taxation Office) defines staking income as ordinary income, the tax on which is paid upon receipt. It does not matter whether you receive a reward directly or through third parties. Capital gains tax is also paid on the sale of assets.
How is crypto staking taxed in Austria?
FMRA (Federal Ministry Republic of Austria) looks at direct and indirect staking differently in terms of taxation. Similar differences exist in some other countries besides Austria. For instance, receiving a staking reward using the Yoroi wallet is not a taxable event, whereas if you use Kraken (indirectly) it is treated as such.
Do I have to pay taxes if I sell my staking rewards?
If you do not sell the received staking rewards, then you only pay income tax. The sale of a reward is a new taxable event when it becomes necessary to pay capital gains tax.
When should I recognize income from my staking rewards?
Obtainment of staking income can be interpreted in two ways. On the one hand, your staking income arises directly at the moment of receiving the reward. On the other hand, you can get a reward, but not withdraw it. If you approach this issue conservatively, then you should turn to the first option, since rewards turn into YOUR income as soon as YOU become their owner. Tax authorities are generally very conservative.
How are staking pools taxed?
If you receive rewards from staking pools, a conservative approach is also appropriate: you receive income at the time of receipt, rather than when withdrawing, since you have the opportunity to withdraw it at any time. Adding and withdrawing crypto assets from the liquidity pool are not taxable events.
How to report staking rewards on your tax return?
How to report crypto staking rewards on taxes? There are many platforms for calculating cryptocurrency taxes, e.g., Koinly or Coinledger. With their help, you can automatically or manually mark staking-related transactions and calculate the fair market value of your staking rewards in the selected currency. After your report is ready, send it to the tax office.
Are staking rewards taxable? FAQ
What if I can’t determine the fair market value of my staking rewards?
Indeed, the fair market value of the staking reward is not always easy to determine, because you need to know the exact transaction time for this purpose. This information is contained in the blockchain, but again, it is not always possible to access it. However, there is always a reasonable way to solve this problem. You can coordinate it with your tax inspector or use well-known platforms, such as Koinly or Coinledger, to create a detailed report and FMV calculation.
Is crypto staking taxed twice?
You can't pay taxes twice on the same profit. You pay income tax at the time of receipt and capital gains tax as you manage it. Nevertheless, under certain conditions, you can also end up at a loss, in which case there is no capital gain. To estimate the CGT, use the fair market value (FMV) of your reward at the time of receipt and sale.
How are crypto staking rewards taxed in the US?
The IRS has not issued any special documents regarding staking, so we have to rely on Notice 2014-21, a document on mining, and proceed from the fact that the IRS approaches mining and staking in a similar manner. Thus, in the USA, staking is subject to income tax and capital gains tax on a par with mining.
What crypto coin has the highest staking rewards?
There are many ratings and platforms that accumulate information on various assets, analytics and statistics, so that you can make profitable investments with maximum comfort. These services often present completely unfamiliar names with top-notch profitability alongside well-known projects. Risk management will allow you to balance your portfolio in a way that is equally profitable and safe.
For instance, here you can see a typical rating, where along with brands such as Ethereum, Uniswap, Polygon and Algorand, there are names that say nothing to most people. When choosing a staking platform, evaluate projects comprehensively in terms of risks, profitability, lifetime, etc. Invest exactly as much as you are willing to lose in a project!