The U.S. Internal Revenue Service (IRS) has laid a new rule classifying cryptocurrency staking rewards as gross income. The IRS announced its landmark decision in Revenue Ruling 2023-14 on July 31, which seeks to clarify the tax treatment of income derived from staking digital assets.
The decision primarily applies to cash-method taxpayers receiving cryptocurrency as a reward for validating transactions on proof-of-stake (PoS) blockchains. The directive covers staking done both independently and via a centralized crypto exchange. According to the ruling, taxpayers’ gross income should now encompass the fair market value of their crypto rewards, determined when the assets are received.
The IRS stipulates that “dominion and control” is the defining factor in determining when the cryptocurrency reward is taxed. In this context, dominion refers to when an investor gains the power to sell, exchange, or dispose of their staking tips.
“The fair market value is determined as of the date and time the taxpayer gains dominion and control over the validation rewards.”
A new dimension in crypto taxation
According to people familiar with the matter, the new ruling implies that while crypto-mining rewards were already subjected to income and capital gains tax, staking tips will follow the same path.
Ryan Selkis, the founder of Messari, offered a different perspective, comparing the taxation of crypto staking to stock dividends. He explained that, at a larger scale, participation in a proof-of-stake network is akin to paying the state an annual holding tax if staking rewards are viewed as gross income.
What PoS blockchains do at scale is embed state-level taxes into their protocols.
The IRS says PoS rewards should be included in gross income, which means crypto has taken the concept of a "stock dividend" and made it taxable.
You get a taxed for slicing a pizza in 10 vs. 8. pic.twitter.com/3qlm6lAGQv
— Ryan Selkis 🪳 (@twobitidiot) July 31, 2023
IRS issues warning against crypto scammers
As the IRS take steps to streamline cryptocurrency taxation, it warns citizens about the rise of crypto-related scams. Officials caution taxpayers to be wary of fraudulent mailings posing as official IRS communications seeking private information.
The Security Summit, a collaboration of IRS, state tax administrators, and tax industry professionals, has reported a surge in victims of these fake letter scams. IRS Commissioner Danny Werfel underscored identifying key signs differentiating legitimate IRS mail from scams.
An end to unannounced home visits
Simultaneously, the IRS announced a significant policy shift: discontinuing unannounced home visits as a method of enforcement. IRS Commissioner Danny Werfel justified this decision during an interview with Ayesha Rascoe, an NPR host. According to Werfel, the IRS has reduced unannounced visits by revenue officers, with exceptions only for unique circumstances. This change in enforcement strategy aligns with President Joe Biden’s pursuit of fair tax practices, focusing on rehiring IRS agents to ensure everyone pays what they owe.
As the IRS breaks new ground in cryptocurrency taxation and enforcement methods, investors and taxpayers must be mindful of their tax obligations and alert to potential scams. According to experts, understanding these changes will help taxpayers navigate the evolving landscape of crypto taxation and IRS enforcement.
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