For tax purposes, the IRS views cryptocurrency and similar digital assets as property. The agency has issued additional guidance on how and when crypto is taxed. 

Cryptocurrency remains an evolving area of law for taxes. A 2023 ruling answered only one of the many questions that surround the relationship between cryptocurrency and taxes. 

Staking Rewards 

A July 2023 ruling focused on staking rewards. This practice allows users to collect rewards while holding that cryptocurrency. These rewards are a sort of digital interest or dividend. 

Not all cryptocurrencies allow staking. Those that do allow blockchain to put crypto to work.  

Staking may have a lock-up period. This refers to the amount of time the owner cannot move or otherwise control staked crypto. Once the lock-up period ends, the owner can hold, sell, or exchange the units just as they would any other property. 

Taxable Income 

Revenue Ruling 2023-14 confirmed that any staking rewards received by a taxpayer are taxable as income. Taxpayers must include the fair market value of any reward units obtained through staking. 

As far as timing, these rewards are only taxable after a lock-in period. As soon as a lock-in period ends, a taxpayer has dominion and control over an asset, which makes that asset taxable. 

In the ruling, the IRS rejected the proposition that reward units or other assets obtained through staking aren't taxable until they are sold or otherwise disposed of. The agency emphasized that cryptocurrency becomes taxable in the year that a taxpayer has dominion and control over the asset. 

Lack of Guidance 

The 2023 ruling requires taxpayers to use a staking reward's fair market value in determining their tax liability. A problem with this ruling is that the IRS has yet to provide guidance on how to determine a fair market value. 

Cryptocurrency represents an ever-changing area of law. Staying up-to-date on changes in the tax code in relation to cryptocurrency can be challenging. 

If you need help, call Senior Partner, Tax Controversy Attorney, and former IRS attorney Brandon A. Keim at (602) 200-7399 or contact him online to discuss your options.