On July 31, 2023, the Internal Revenue Service (IRS) released Revenue Ruling 2023-14, which provides that cryptocurrency stakers should include the value of the rewards they earn from staking in their gross income. Specifically, the ruling provides that if a cash-method taxpayer stakes cryptocurrency native to a proof-of-stake blockchain and receives additional units of cryptocurrency as rewards when validation occurs, the fair market value of the rewards received is included in the taxpayer's gross income in the tax year in which the taxpayer gains dominion and control over the rewards. The same is true if a taxpayer stakes cryptocurrency through a cryptocurrency exchange and the taxpayer receives additional units of cryptocurrency as rewards as a result of the validation.
The ruling is not a complete surprise following several notices and rulings of the IRS with respect to other cryptocurrency activities. In Notice 2014-21, the IRS announced that when a taxpayer successfully mines cryptocurrency, the fair market value of such cryptocurrency as of the date of receipt is includible in gross income. In Revenue Ruling 2019-24,1 the IRS ruled that a taxpayer has gross income as a result of an airdrop of a new cryptocurrency following a hard fork if the taxpayer receives units of new cryptocurrency. In the 2019 ruling, the IRS also clarified that a taxpayer does not have receipt of cryptocurrency until the taxpayer is able to exercise dominion and control over the cryptocurrency. The new ruling generally follows such line of authority.
If you have any questions about any tax issues involved in cryptocurrency, please contact Greg Broome, Han Shen, or any member of the tax practice at Wilson Sonsini.
[1] For more information about Revenue Ruling 2019-24, see our alert: “IRS Issues Guidance for Transactions Involving Virtual Currency,” accessible at https://www.wsgr.com/en/insights/irs-issues-guidance-for-transactions-involving-virtual-currency.html. For more information about cryptocurrency, see our alerts: “Trending in Tech: Tax-Exempt Vehicles for Open Source Blockchain and Cryptocurrency Development,” accessible at https://www.wsgr.com/en/insights/trending-in-tech-tax-exempt-vehicles-for-open-source-blockchain-and-cryptocurrency-development.html; “Initial Coin Offerings: An Overview of Regulatory Considerations,” accessible at https://www.wsgr.com/en/insights/initial-coin-offerings-an-overview-of-regulatory-considerations.html.
