At LA Tech Week 2025 (October 13-19), one of the most heated debates was about staking reward taxation. Tax professionals, crypto developers, and protocol founders had completely different views on when staking rewards should be recognized as taxable income.
This is CRITICAL for accountants because the IRS position is unclear, clients are confused, and the tax liability can be MASSIVE if you get it wrong.
What Is Crypto Staking?
For those less familiar with the mechanics:
Proof-of-Stake (PoS) blockchains (Ethereum, Cardano, Solana, etc.) reward participants for “staking” their tokens to help secure the network.
How it works:
- You lock up your tokens (e.g., 32 ETH for Ethereum)
- Your tokens participate in network validation
- You receive staking rewards (additional tokens) over time
- Rewards typically 4-8% APY (annual percentage yield)
Example:
- Stake 32 ETH (worth $96,000 at $3,000/ETH)
- Earn 5% APY = 1.6 ETH per year
- Monthly rewards: ~0.133 ETH (~$400/month)
The tax question: WHEN do you recognize $400/month income?
- Upon receipt (even if locked)?
- When you can withdraw?
- When you actually sell?
The IRS Position (Sort Of)
IRS Notice 2014-21: Virtual currency (including crypto) is property.
General tax principle: Income from property is taxable upon receipt.
IRS Chief Counsel Advice (CCA) 202124008 (June 2021):
Discussed whether newly created cryptocurrency (through mining or similar) is taxable upon receipt or upon sale.
Implication: IRS likely treats staking rewards as income upon receipt.
BUT: No official IRS guidance specifically addressing staking rewards. We’re applying general principles.
The Jarrett v. United States Case (2023)
This is THE case everyone at LA Tech Week was discussing.
Background:
- Joshua Jarrett staked Tezos (XTZ) tokens
- Received staking rewards
- Filed tax return treating rewards as income upon receipt
- Later filed amended return seeking refund, arguing rewards shouldn’t be taxed until sold
- Sued IRS for refund
Jarrett’s argument:
Staking rewards are “newly created property” (like a baker making bread from flour). Under IRC Section 61, creation of property isn’t taxable until you sell it.
IRS argument:
Staking rewards are compensation for services (validating transactions), therefore taxable as ordinary income upon receipt.
District Court ruling (May 2023):
Sided with Jarrett - ruled rewards are “newly created property” and not taxable until sold.
IRS response:
Did NOT issue a refund. Instead, government is appealing the case.
Current status (October 2025):
Case is on appeal. We’re waiting for Circuit Court ruling.
What this means for accountants:
- Conflicting positions (District Court vs. IRS)
- No final guidance
- Clients caught in the middle
- We have to advise despite uncertainty
The Four Main Positions
At LA Tech Week, I heard four different tax positions:
Position 1: Conservative (IRS Position)
Income upon receipt, even if locked/illiquid
Rationale:
- Follows general tax principles (income from property taxable upon receipt)
- Aligns with IRS Chief Counsel Advice
- Staking rewards = compensation for network validation services
- Similar to stock dividends (taxable when declared, even if can’t sell immediately)
Tax treatment:
- Ordinary income at fair market value on receipt date
- Report on Schedule 1 (Line 8z - Other income)
- Creates cost basis for future sale
Example:
- Receive 0.133 ETH in October 2025
- ETH = $3,150 on receipt date
- Ordinary income: $419 (0.133 × $3,150)
- Cost basis of received ETH: $419
- Later sell ETH for $3,500: Capital gain of $47 (0.133 × [$3,500 - $3,150])
Pros:
- Low audit risk
- Aligns with IRS position
- Defensible
Cons:
- Pay tax on illiquid assets
- Need cash reserves to pay tax
- Higher current tax burden
Position 2: Moderate (Receipt When Accessible)
Income when you have unfettered access
Rationale:
- Constructive receipt doctrine: Income taxable when you have unfettered access
- If tokens are locked (can’t withdraw), you don’t have constructive receipt
- Once unlock period ends, THEN you have income
- Aligns with employment law (restricted stock not taxable until vested)
Tax treatment:
- No income if rewards locked
- Income upon unlock/accessibility
- Report as ordinary income when accessible
Example:
- Receive 0.133 ETH in staking rewards (October 2025)
- ETH locked for 6 months (can’t withdraw until April 2026)
- No income in 2025
- April 2026: ETH unlocks at $3,400/ETH
- 2026 income: $452 (0.133 × $3,400)
Pros:
- Matches cash flow (only taxed when you can access)
- Constructive receipt doctrine support
- More “fair” for locked tokens
Cons:
- IRS may disagree
- Tracking unlock dates is burdensome
- Higher audit risk than Position 1
Position 3: Aggressive (Jarrett Position)
No income until sold
Rationale:
- Staking rewards are “newly created property”
- Creation of property isn’t taxable event
- Only taxable upon disposition (sale)
- Supported by Jarrett District Court ruling
Tax treatment:
- No income when received
- All gains reported as capital gains when sold
- Cost basis = $0 (nothing paid for rewards)
Example:
- Receive 0.133 ETH in October 2025
- No income reported in 2025
- Sell in December 2025 for $3,200
- Capital gain: $426 (0.133 × $3,200 - $0 basis)
Pros:
- Defer all tax until sale
- All income taxed as capital gains (lower rates)
- Supported by one court ruling
Cons:
- IRS is appealing (may be overturned)
- High audit risk
- Penalties if IRS prevails
- All gain taxed as short-term capital gains (equivalent to ordinary income rates if held < 1 year)
Position 4: Hybrid (Elective Method)
Report conservatively, but build cash reserves expecting future law change
Rationale:
- Report as income upon receipt (Position 1) to be safe
- But expect Jarrett ruling may prevail
- If law changes, file amended returns for refunds
- Avoid underpayment penalties while preserving future flexibility
Tax treatment:
- Current: Report as income upon receipt
- Future: If Jarrett prevails, amend prior returns and claim refunds
Pros:
- No audit risk
- No underpayment penalties
- Can recover taxes if law changes
Cons:
- Pay maximum tax upfront
- Refund process takes years
- Opportunity cost of taxes paid early
The Locked Staking Problem
This is where it gets REALLY controversial.
Many staking protocols lock tokens for months:
- Ethereum: Staked ETH was locked until “Shapella” upgrade (April 2023)
- Cardano: Staking rewards accessible but original stake locked for 5 days
- Polkadot: 28-day unbonding period
- Some liquid staking protocols: 6-12 month lock-ups
The tax problem:
If you receive $10,000 in staking rewards but can’t sell for 12 months, where do you get cash to pay $4,000 in taxes (40% rate)?
Real client scenario from LA Tech Week discussion:
Client: Institutional investor
- Staked 1,000 ETH (when ETH = $2,000) = $2M position
- 5% APY = 50 ETH/year in rewards
- Rewards worth $100K/year
- Tax at 40% = $40K/year tax bill
- Problem: ETH was locked (before Shapella upgrade), couldn’t sell to pay taxes
Options client considered:
- Sell other assets to pay tax (but didn’t want to liquidate other holdings)
- Borrow against ETH (but DeFi rates were 8-12%, expensive)
- Pay quarterly estimated taxes from operating cash (reduced business liquidity)
- Take aggressive position (don’t report until liquid) - RISKY
What client did: Paid taxes from operating cash, but resented “paying tax on phantom income.”
The Liquidity Timing Mismatch
Even when rewards are “accessible,” they may not be liquid (sellable).
Example - Staking obscure token:
- Stake 100,000 tokens of small-cap altcoin
- Receive 5,000 tokens/year in rewards
- 5,000 tokens × $2/token = $10,000 income
- Tax due: $4,000 (40%)
Problem:
- Token has thin liquidity (only $500/day trading volume)
- Selling 5,000 tokens would crash price
- Can’t realistically sell to pay taxes
- Must use other funds to pay $4,000 tax
This is common for:
- Small-cap altcoins
- New protocol tokens
- Governance tokens with low liquidity
Different Staking Models - Different Tax Treatment?
At LA Tech Week, developers pointed out there are MANY different staking models:
1. Native Protocol Staking (Direct Validator)
Example: Running Ethereum validator node (32 ETH minimum)
Characteristics:
- You directly validate transactions
- Receive block rewards + transaction fees
- Active participation required
Tax argument FOR ordinary income:
- You’re providing services (validation)
- Compensation for work performed
- Similar to mining income (clearly ordinary income)
2. Delegated Staking
Example: Delegate to Coinbase or other staking provider
Characteristics:
- You delegate tokens to professional validator
- Validator does the work
- You receive portion of rewards (minus validator fee)
Tax argument FOR ordinary income:
- Similar to dividend income or interest
- Passive return on investment
- Report as “other income”
3. Liquid Staking Derivatives
Example: Lido (stETH), Rocket Pool (rETH)
Characteristics:
- Deposit ETH, receive derivative token (stETH)
- Derivative token appreciates as staking rewards accrue
- Can trade derivative token immediately (liquid)
Tax question:
- Is this a taxable exchange? (ETH → stETH)
- When are rewards recognized? (Continuously as stETH appreciates? Or upon redemption?)
IRS hasn’t addressed this AT ALL.
Conservative approach:
- Treat ETH → stETH exchange as taxable event (like crypto-to-crypto swap)
- Track cost basis of stETH
- Recognize gain/loss when redeem stETH for ETH
Aggressive approach:
- Treat stETH as “receipt” of ETH (not taxable exchange)
- No income until redeem stETH
- Gain/loss calculated at redemption
4. DeFi Yield Farming Disguised as “Staking”
Example: Many DeFi protocols call liquidity provision “staking”
Characteristics:
- Deposit tokens into liquidity pool
- Receive “staking rewards” (actually LP rewards)
- Much higher yields (20-300% APY - unsustainable)
Tax treatment:
- This is NOT staking (it’s yield farming)
- Rewards are ordinary income upon receipt (clear IRS position)
- See our earlier DeFi discussion
How to Track Staking Rewards in Beancount
Regardless of which tax position you take, you need to track:
- Amount received
- Date received
- FMV at receipt
- Cost basis
- Holding period
Conservative approach (Position 1 - Income upon receipt):
2025-10-15 * "Ethereum Staking Reward" #staking-income
reward_amount_eth: 0.133
eth_usd_rate: 3150.00
reward_value_usd: 419.00
tax_treatment: "ordinary_income"
source: "Coinbase Staking"
Income:Staking:ETH -419.00 USD
Assets:Crypto:ETH:Staked 0.133 ETH @ 3150.00 USD
When later sold:
2026-03-20 * "Sell Staked ETH" #staking-sale
amount_sold_eth: 0.133
cost_basis_usd: 419.00 ; From staking reward recognition
sale_price_usd: 3500.00
proceeds: 465.50
capital_gain: 46.50
holding_period: "long_term" ; Held > 1 year from receipt
Assets:Crypto:ETH:Staked -0.133 ETH @ 3150.00 USD
Assets:Checking 465.50 USD
Income:CapitalGains:LongTerm -46.50 USD
Aggressive approach (Position 3 - No income until sold):
2025-10-15 * "Ethereum Staking Reward Received" #staking-receipt
reward_amount_eth: 0.133
cost_basis: 0.00 ; No basis if not recognized as income
tax_treatment: "deferred_until_sale"
note: "Following Jarrett case theory"
Assets:Crypto:ETH:Staked 0.133 ETH @ 0.00 USD
2026-03-20 * "Sell Staked ETH - Recognize All Gain" #staking-sale-aggressive
amount_sold_eth: 0.133
cost_basis: 0.00
sale_price: 3500.00
total_gain: 465.50 ; All proceeds = gain (zero basis)
holding_period: "short_term" ; From receipt to sale < 1 year
Assets:Crypto:ETH:Staked -0.133 ETH @ 0.00 USD
Assets:Checking 465.50 USD
Income:CapitalGains:ShortTerm -465.50 USD
The Quarterly Estimated Tax Challenge
If you take Position 1 (conservative), you must pay estimated taxes QUARTERLY on illiquid staking rewards.
Example calculation:
Q4 2025 staking rewards:
- Received 0.4 ETH in rewards
- Average ETH price: $3,200
- Total income: $1,280
Estimated tax due (by January 15, 2026):
- Federal tax (32% bracket): $410
- Self-employment tax (15.3%): $196
- State tax (5%): $64
- Total: $670
Problem: Client must pay $670 in cash for $1,280 in ETH rewards they may not have sold.
My Recommendation Framework
After LA Tech Week discussions, here’s my advice to clients:
For Small Stakes (<$10K/year rewards): Position 1 (Conservative)
- Report income upon receipt
- Pay estimated taxes quarterly
- Low audit risk, sleep well at night
For Medium Stakes ($10K-$100K/year rewards): Position 2 (Moderate)
- If rewards clearly locked/inaccessible: Defer until accessible
- Document lock-up terms extensively
- Recognize income when withdraw-eligible
- Reasonable middle ground
For Large Stakes (>$100K/year rewards): Position 1 + Tax Planning
- Report conservatively (income upon receipt)
- BUT implement tax mitigation:
- Sell portion of rewards immediately to cover taxes
- Use DeFi borrowing to cover tax payments (if rates favorable)
- Charitable donations of appreciated tokens (if charitably inclined)
- Consider staking through IRA (if qualified custodian available)
NEVER Recommend: Position 3 (Jarrett) for most clients
- Too aggressive given IRS is appealing
- High penalty risk if overturned
- Only for sophisticated taxpayers willing to fight IRS in Tax Court
Questions for the Community
-
What position are you taking with your clients? Conservative (1), Moderate (2), or Aggressive (3)?
-
For those taking Position 1: How are clients reacting to paying tax on illiquid staking rewards?
-
For Beancount users: How are you tracking the “income recognized” vs. “cash received” timing difference?
-
Has anyone had clients audited on staking rewards? What did IRS focus on?
-
What happens when Jarrett case concludes? If IRS loses appeal, do we amend all prior returns?
The Bottom Line
Staking reward taxation is:
- Legally uncertain (Jarrett case pending)
- Administratively burdensome (tracking each reward)
- Cash-flow challenging (taxed on illiquid income)
- Evolving rapidly (expect IRS guidance eventually)
My conservative recommendation: Report as income upon receipt UNLESS rewards are clearly locked and inaccessible for extended period.
Document everything: Whatever position you take, document your reasoning thoroughly. IRS will ask questions.
From LA Tech Week: This was the #1 most debated crypto tax issue. Everyone agrees we need clear IRS guidance. Until then, we’re navigating gray areas.
Fred Wilson, CFA
Financial Planning & Analysis
P.S. - I’m tracking the Jarrett case closely. When Circuit Court rules, I’ll post an update. Also working on a “Staking Rewards Tax Position Memo” template for client files - will share if there’s interest.
Key Sources:
- LA Tech Week 2025 (October 13-19)
- Jarrett v. United States, No. 3:21-cv-00419 (M.D. Tenn. May 26, 2023)
- IRS Notice 2014-21
- IRS Chief Counsel Advice 202124008
- Rev. Rul. 2019-24 (crypto fork taxation)