Tax Court Upholds Income Tax on Cryptocurrency Staking Rewards

The US Tax Court has upheld that staking income from cryptocurrency rewards is taxable as property, not currency. The ruling was made in the case of Paschall v. Commissioner, where a taxpayer received $33,354 in Cardano tokens as staking rewards through eToro in 2021.

The IRS assessed an income tax deficiency and accuracy-related penalty on the taxpayer. The Tax Court rejected arguments that staking rewards resembled stock dividends or self-created property, finding instead that a token holder's proportionate share of outstanding tokens increased upon receipt of rewards.

This ruling follows the 2014 IRS declaration that virtual currency would be treated as property for federal tax purposes, and is in line with the Infrastructure Investment and Jobs Act codifying this approach in 2021. Congress is drafting bills to overturn what it views as punitive rules, including the Digital Asset Tax Certainty Act, which aims to defer income recognition from mining and staking until disposition of tokens.

A White House working group has suggested Treasury issue guidance addressing de minimis treatment of digital assets received via airdrops, staking, hard forks, and mining. The IRS has also issued guidance on the taxation of cryptocurrency rewards, including Revenue Ruling 2019-24, which states that if a taxpayer receives new tokens via an airdrop following a hard fork and can immediately dispose of them, those tokens constitute gross income at their fair market value upon receipt.