Crypto tax compliance is one of the most consistently misunderstood and inconsistently reported areas in personal finance. Millions of crypto users hold staking rewards without tax planning, discover at year-end that their staking yield has created significant ordinary income tax liability, or incorrectly report cost basis in ways that may create IRS audit risk. As crypto adoption grows and IRS enforcement of crypto reporting increases (including mandatory 1099-DA broker reporting starting 2025), understanding staking tax treatment has become essential for any active crypto user.
US Federal Tax Treatment
The following sections cover this in detail.
IRS Position: Ordinary Income at Receipt
The IRS’s official position on staking rewards is established in Revenue Ruling 2023-14, published July 31, 2023:
> “Taxpayers who receive rewards through proof-of-stake validation activities must include the fair market value of the cryptocurrency received as gross income in the taxable year in which they receive the cryptocurrency.”
What this means practically:
- If you stake ETH and earn 0.1 ETH on October 5th when ETH is trading at $2,000
- You have $200 of ordinary income on October 5th (taxable in that year)
- Your cost basis in that 0.1 ETH is $200
- If you later sell that 0.1 ETH for $300, you have $100 of capital gain
Tax rate implication: Ordinary income from staking is taxed at marginal income tax rates (10–37% federal) — the same as wages. This is more expensive than long-term capital gains rates (0–20%) that would apply if staking rewards were taxed only at disposal.
How Income Is Valued
Fair market value at time of receipt — the IRS requires you to know the USD value of crypto when staking rewards hit your wallet.
For liquid assets (ETH, SOL, etc.): The closing price on a major exchange on the day received is the most defensible valuation.
For illiquid assets: The IRS provides less guidance; the most conservative approach is using the last known trade price.
Frequency of recognition:
- Daily staking rewards: Each day’s rewards represent taxable income at that day’s price
- Compounding staking (like staked ETH liquid staking tokens): The mechanics are more complex — liquid staking tokens (stETH, rETH) may not produce discrete rewards but rather appreciation in the exchange rate. The IRS has not issued definitive guidance on liquid staking tokens.
The Jarrett v. United States Challenge
The following sections cover this in detail.
Background
John and Cecelia Jarrett, a Nashville couple, staked Tezos (XTZ) and received block validation rewards. They paid taxes on the staking rewards as income per IRS guidance — then filed for a refund, arguing that staking rewards are not income when received but rather newly created property (like a farmer growing crops or a baker baking bread), taxable only when sold.
The property creation argument: When you validate blocks and receive new tokens, the Jarretts argued, you have created something new — you didn’t receive something that already existed (like wages, dividends, or interest). New property (like a painting you create) is not taxed until you sell it.
Case History
- 2021: The Jarretts filed a complaint in the Middle District of Tennessee seeking a $3,793 refund for taxes paid on staking rewards
- 2022: The DOJ offered a full refund (mooting the case) to avoid a legal ruling that could have established precedent against the income treatment
- 2023: Jarretts refiled a second complaint covering a new tax year’s worth of staking rewards, forcing the court to address the merits
- Revenue Ruling 2023-14: The IRS published the ruling during the second Jarrett case, underscoring its intent to treat staking as income and establishing an official guidance document (vs. the previous guidance gap)
Status and Significance
As of 2024, the Jarrett case remains unresolved. Revenue Ruling 2023-14 is not law — it’s IRS administrative guidance. The US Tax Court or Circuit Courts could still rule differently. If a court upholds the property creation theory, stakers who paid income tax on receipt could potentially amend returns and recover taxes paid.
Practical implication: Most tax professionals recommend following Revenue Ruling 2023-14 (treat staking as income at receipt) since:
- It’s the current IRS official position
- Deliberate non-compliance creates audit and penalty risk
- The Jarrett outcome is uncertain
Cost Basis Accounting Methods
Once you’ve acquired crypto (whether through purchase or staking rewards), how you calculate the “cost basis” on subsequent sales affects your capital gain or loss.
Federal tax law permits several lot selection methods for crypto (IRS Rev. Proc. 2019-24 and Rev. Proc. 2024-28):
FIFO (First In, First Out)
Default method if no specific identification is made. The first assets you acquired are assumed to be the first you sold.
Example: You buy 1 ETH at $500 in January, 1 ETH at $3,000 in November of the same year. In December you sell 1 ETH at $3,500. Under FIFO, you sold the January ETH — capital gain = $3,000.
When FIFO hurts: In a market where prices rose over time, FIFO often selects your lowest-cost lots first, maximizing capital gains. During tax year end, this can increase your tax bill significantly.
HIFO (Highest In, First Out)
Selects the highest-cost lots first for sale, minimizing capital gains in most market conditions.
Example: Same as above — HIFO sells the November ETH ($3,000 cost basis), capital gain = $500.
When to use: HIFO minimizes gains and is often the most tax-efficient option in rising markets. Requires detailed per-lot tracking.
Important: HIFO requires that you specifically identify each lot at the time of sale — you cannot apply HIFO retroactively. Tax software must record which specific lots are sold.
LIFO (Last In, First Out)
Sells the most recently acquired lots first. Common in commodity accounting; less common in crypto because it can increase short-term capital gain recognition.
Specific Identification
The most flexible and potentially most tax-efficient approach: you manually identify which specific lots you’re selling at the time of each transaction. This requires detailed records matching specific wallet transactions to specific purchases.
IRS requirements for specific ID: The IRS requires that for specific identification to be valid, you must “adequately identify” the specific lots — i.e., document the cost basis, acquisition date, and specific transaction for each identified lot at time of sale.
Form 1099-DA: The Coming Reporting Change
Starting 2025 tax year (for 2026 filing):
Form 1099-DA is a new IRS form requiring “crypto brokers” (centralized exchanges, custodians) to report:
- Customer crypto sales proceeds
- Cost basis (for covered securities)
- Date acquired and date sold
- Gross proceeds
Similar to stock brokerages: This mirrors how Robinhood or Schwab sends you Form 1099-B showing all your stock trades — crypto exchanges (Coinbase, Kraken, Gemini) will be required to send equivalent 1099-DAs.
What’s NOT included in 1099-DA (initially):
- DeFi protocols (not custodial brokers)
- Self-hosted wallet transactions
- NFT sales (separate guidance expected)
- Staking rewards (uncertain; IRS guidance pending specific to 1099-DA)
Impact: Tax accuracy will improve for exchange-based trades; users will receive official documentation that previously required manual reconciliation. Under-reporting of gains (a common current problem) will decrease as the IRS matches 1099-DA data to returns.
Crypto Tax Software
The following sections cover this in detail.
Koinly
- Features: Connects to 700+ exchanges and wallets via API; supports DeFi protocols, NFTs, staking; generates IRS forms (8949, Schedule D, Form 1040 attachment)
- Pricing: Free (100 transactions/year); $49–$179/year depending on transaction count
- Strength: International support (50+ countries); early DeFi protocol integration
- Best for: Users with complex multi-chain portfolios or international tax needs
TaxBit
- Features: Enterprise and consumer products; CPA-partnered for review; strong institutional client base
- Pricing: Consumer: free–$175/year; Enterprise: custom pricing
- Strength: Regulatory compliance depth; used by prominent exchanges
- Governance: TaxBit worked with IRS on Form 1099-DA design
CoinTracker
- Features: Real-time portfolio tracking + tax reporting; clean UI
- Pricing: Free (25 transactions); $59–$299/year
- Strength: Coinbase-integrated (official partnership); easiest onboarding for Coinbase-heavy users
- TurboTax integration: Direct export to TurboTax
TokenTax
- Features: CPA-first platform with attached tax professional services
- Pricing: $65–$2,500+/year depending on complexity; includes CPA filing service at higher tiers
- Strength: Full-service option for users who want professionals to file for them
- Best for: High-net-worth crypto users who want a hybrid software + professional service
International Tax Treatment
The following sections cover this in detail.
United Kingdom (HMRC)
- HMRC guidance (2022): Staking rewards are either “miscellaneous income” (for occasional stakers) or “trading income” (for those operating as a staking business) at receipt
- Cost basis: HMRC uses a specific UK “pool” method (Section 104 holding) for crypto cost basis — different from FIFO/HIFO
- Capital gains: UK has an annual CGT allowance (£3,000 in 2024 reduced from £12,300 previously) — gains below this amount are not taxable
European Union (Varies by Country)
- Germany: Staking rewards potentially tax-free if held >1 year (staking may not reset the 1-year holding period clock — under active review by Bundesministerium der Finanzen)
- France: 30% flat-rate “PFU” tax on crypto gains including staking; specific staking guidance from French DGFiP
- Portugal (pre-2023 change): Was famous for 0% crypto tax — changed in 2023; now 28% capital gains and staking income taxed like dividends
Australia (ATO)
Australian Tax Office treats staking rewards as ordinary income at fair market value on receipt. Capital gains event applies separately on future disposal with 50% CGT discount for assets held >12 months.
Related Terms
Sources
Internal Revenue Service. (2023). Revenue Ruling 2023-14: Treatment of Cryptocurrency Staking Rewards. Internal Revenue Bulletin 2023-33, August 14, 2023.
Jarrett v. United States. (2022). Joshua Jarrett and Jessica Jarrett v. United States of America. Case No. 3:21-cv-00419, Middle District of Tennessee.
Koinly Research. (2024). State of Crypto Taxes 2024: Compliance, Reporting, and Software Adoption. Koinly Annual Crypto Tax Report, 2024.
Perkins Coie LLP. (2024). Digital Assets Tax Guide 2024: IRS Enforcement, Form 1099-DA, and Planning Considerations. Perkins Coie Client Briefing, February 2024.
IRS Notice 2014-21, IRS Revenue Procedure 2024-28. (2014, 2024). IRS Guidance on Virtual Currency. Internal Revenue Service, United States.