Raising the Stakes: Tax Court Finds that Crypto Staking Rewards are Income

In what is the first decision of its kind, the Tax Court in Paschall v. Commissioner held that crypto staking rewards are income.

The facts of the case are straightforward. The taxpayer held Cardano tokens in an account on an exchange that offered staking services for its customers. The taxpayer’s tokens were staked throughout the tax year at issue, for which the taxpayer received rewards in the form of additional Cardano tokens. In finding that the staking rewards were income, the Tax Court rejected two common arguments raised by taxpayers in this context:

1. The Court refused the taxpayer’s analogy of staking rewards to nontaxable stock dividends, reasoning that the rewards increased the taxpayer’s share of all outstanding Cardano tokens. The tokens were not distributed proportionately to all token holders – only to those holders that agreed to stake their holdings.

2. The Court distinguished staking rewards from nontaxable self-created property, finding that the stakers did not create anything by themselves and were not owners/operators of the staking pool. Unlike a baker who bakes a cake, the Court found they lacked the power to decide whether and when the property was created.

In rendering its decision, the Tax Court sidestepped the validity of a prior Revenue Ruling regarding the taxability of staking rewards (Rev. Ruling 2023-14), relying on Section 61 and related caselaw as the basis for the Court’s decision. The Tax Court docket sheet (containing a copy of decision) is linked HERE.

Despite the novelty of the issue, the Court issued its decision in memorandum form. Memorandum decisions have limited precedential value, and courts and future litigants are not strictly bound by them. Nevertheless, taxpayers would be well-advised to seek counsel on the full impact of the Court’s decision in connection with their staking reward tax positions.

If you or your client has any questions about this blog post or other tax-related topic, feel free to contact me at (214) 749-2464 or adaddino@meadowscollier.com.