The information herein is being provided to you for general informational purposes only. It is not intended to be, nor should it be relied upon as tax, legal, business, or investment advice. Each taxpayer is strongly urged to consult his, her or its own tax advisor regarding the tax consequences of staking digital assets. This information is accurate as of March 28, 2025 and Figment undertakes no obligation to update the information herein.
What is Staking
Staking is a process in which token holders earn rewards by helping secure a blockchain network. Earning rewards through staking has emerged as a popular way for token holders to realize a benefit without selling their assets. The reporting and tax treatment of staking rewards remains complex given regulatory uncertainty in many jurisdictions around the globe. This article examines tax implications that can arise from the staking and disposition of digital assets.
Tax Recognition and Reporting
Based on their issued guidance and interpretation, the position of the U.S. Internal Revenue Service (“IRS”), Canada Revenue Agency, and various European and Asian tax authorities is that when staking rewards are received, they are taxed on account of ordinary income as opposed to capital. This treatment would be consistent whether a taxpayer is using a pooled staking service, solo staking or staking with a third-party staking service provider such as Figment.
In the absence of clear guidance from tax authorities in other jurisdictions, one common practice has been to assume staking rewards are ordinary income in order to mitigate future risk and liability. When reporting as ordinary income, the fair market value (“FMV”) of the staking rewards received must be calculated at either the spot or average rate, depending on the location. The FMV would then be included in a taxpayer’s taxable income and create the cost basis used in determining any gain or loss on future disposition. The cost basis methodology is dependent on the jurisdiction a company is domiciled in and can range from, but not limited to, Weighted Average Cost, First in First Out, Last in First out, and Specific Unit.
Future Disposition of Digital Assets
In addition to staking rewards being potentially subject to income tax when received, there may also be tax implications at the time of disposition through a taxable gain or loss. To calculate the corresponding gain or loss, the FMV when the asset is sold is compared to the unit’s cost basis when acquired.
- Gain on Disposition = FMV > Cost Basis
- Loss on Disposition = FMV < Cost Basis
The Gain or Loss on disposition can either be classified as ordinary income or a capital item, depending on the view of the relevant tax authority. Typically, a taxpayer would prefer to have these taxed on account of capital as this would come with favourable tax rates, or zero income tax in certain tax efficient jurisdictions. Determining whether a disposition triggers ordinary income or capital gains and losses is subjective and based on the specific fact pattern and, as such, should be reviewed carefully with a tax advisor.
Sales and Value Added Tax (“Sales Tax”)
Sales Tax is ever evolving and clarity has generally lagged behind that of income tax. The two biggest questions are:
1. Is Sales Tax due upon the receipt of staking rewards?
While there has been limited guidance on the application of sales tax for staking rewards, both Canada and Switzerland have outlined that they do not treat staking rewards as remuneration of being engaged in a commercial activity and therefore do not require collection or self-assessment of sales tax for staking. If a taxpayer’s country has guidance released for sales tax with respect to Bitcoin mining rewards, this may be a good starting point on the expected sales tax treatment for staking rewards as it also involves receipt of rewards in exchange for securing a blockchain network.
2. Is Sales Tax due upon the subsequent disposition of a digital asset?
For Sales Tax purposes, tax authorities generally classify a digital asset as a type of payment instrument or a utility token. It is common for the disposition of a payment instrument to be treated in a similar fashion as an exempt financial service, which would not require the collection of Sales Tax. Therefore, if a digital asset does not fall into the classification of a payment instrument, such as a non-fungible or utility token, there may be sales tax associated with the disposition of the property.
Through a US lens, sales tax is a state matter, and most individual states have yet to issue definitive guidance on the treatment of staking rewards and their subsequent disposition.
US Staking Considerations: Unrelated Business Taxable Income (“UBTI”) and Effectively Connected Income (“ECI”)
UBTI refers to income generated by a tax-exempt organization through activities that are not related to its primary tax-exempt purpose. In the U.S., there has been limited clarity from the IRS leading to uncertainty on how staking rewards would be treated under UBTI, specifically with respect to VC funds that participate in staking activities. With proactive tax planning, VC funds can potentially structure around UBTI inclusion with the use of alternative investment vehicles or blocker corporations. While these structures can provide alternatives for UBTI, there can always be fact dependent risks and downsides, which must be fully vetted.
Non-U.S. residents are generally subject to U.S. federal income tax in relation to any income that is deemed to be effectively connected with a trade or business in the United States. Due to lack of guidance from the IRS, it is open to interpretation on how staking activities would be treated for purposes of the ECI rules. U.S. resident VC funds that engage in staking activities could cause international taxpayers (ie. Foreign LPs) to have ECI and become taxable in the U.S. Under some scenarios, the same blocking structures that can be implemented to mitigate UBTI concerns, can also be used for International Taxpayers when dealing with ECI concerns.
Other Factors and Considerations
Although the income tax treatment of staking rewards is becoming more defined in certain jurisdictions, there are still other factors to consider that may have an impact when it comes to what position to take on the tax treatment of staking rewards and the sale or transfer of digital assets, such as:
- Location of the Infrastructure: How do various tax authorities account for the location of staking infrastructure when sourcing staking revenues?
- Withholding Tax: Are there any withholding taxes due to tax authorities upon receipt of staking rewards?
- Timing of Rewards: Does a tax authority include the rewards into taxable income when they are received or when they are earned throughout the reward cycle?
- Wallets and Private Keys: Does the location and storage of a taxpayer’s digital assets impact revenue sourcing from staking?
Conclusion
Taxation of digital assets, including staking rewards, is very complex and highly fact dependent based on the location of a taxpayer, the digital assets and potentially any infrastructure as well. While some general approaches have been discussed herein, it is always best practice to seek advice from an experienced tax advisor to achieve the most tax efficient outcome and to ensure compliance in all relevant jurisdictions.
