By George Ward
The Internal Revenue Service (IRS) of the United States issued a significant announcement regarding cryptocurrency staking on Monday. Following the new development, individuals who engage in crypto must report their staking rewards as gross income and meet their tax obligations.
The updated information is governed under the US Revenue Ruling 2023-14.
Crypto Staking Rewards As Gross Income
Before the updated policy, the IRS stated that wages, capital gains, dividends, and business income are all examples of gross income. Now, the tax body has updated the policy to include direct gains from crypto staking.
However, the US tax agency added that the gains become taxable when the individual has complete control over the tokens. In addition, staking or participating in the validation process of a blockchain network will now attract significant tax consequences.
This broader definition reflects the authorities’ efforts to keep up with the digital economy’s fast-paced and innovative nature. By explicitly including staking rewards, the IRS intends to ensure fairness and clarity in the taxation of various income streams, including those from relatively new financial instruments such as cryptocurrencies.
A good development of this updated policy is that individuals engaged in staking activities clearly understand their tax obligations. Thus, they have no excuse not to be transparent or not comply with the policy when filing their income reports.
The IRS ruling states that when a taxpayer uses the cash method to stake cryptocurrency on a proof-of-stake blockchain and earns additional units of cryptocurrency as rewards during the validation process, they must report the fair market value of these rewards as part of their gross income.
What Does This Means For The Crypto Industry?
The IRS’ expansion of its definition of gross income affects many aspects of the cryptocurrency ecosystem. According to the recent available data, the United States has the world’s largest population of crypto investors, with approximately 50 million residents owning one digital asset or another.
The current statistics highlight US residents’ deep interest and active participation in the digital asset market. It also reflects the growing popularity of cryptocurrencies as a viable investment option nationwide.
Before updating its policy regarding the definition of gross income, the IRS previously tried the enforcement approach. The tax agency requested the court issue an order to Kraken, a prominent cryptocurrency exchange, on June 30, 2023, demanding the disclosure of user identities, including pseudonyms, for accounts that had engaged in crypto transactions valued at $20,000 in any single year between January 2016 and December 2020.
However, Kraken defied the court order, claiming that the IRS was requesting information that was not necessary. In its official statement, Kraken reiterated its firm belief in protecting its users’ privacy. However, the IRS’ approach raised broader questions about crypto firms’ operating environment, where they must balance regulatory requirements and compliance with protecting individual data.