Taxes on Staking rewards
Are staking rewards taxed twice?
Some crypto investors argue that crypto staking rewards are taxed twice, something that should not be allowed under the current tax law, but let’s look into it.
You have to recognize the fair Market Value of the crypto staking rewards when you receive them, and those are taxed at the income level.
If you hold your coins and later sell them at a profit, compared to the previous cost basis (when you received the rewards), you’d be taxed at a capital gains tax level.
Let’s assume you locked ETH and received rewards at a 5% APY. After a couple of months, you receive 0.2 ETH. When you receive that 0.2 ETH, each ETH is worth $1K.
When you receive the 0.2 ETH, you should recognize its FMV ($200) as income.
If you hold that ETH for 14 months and decide to sell it, you’d need to recognize the gain/loss in the transaction. Let’s assume that each ETH is worth $1.5K at that time. In that case, you should recognize a gain of $100 ($300-$200).
Staking rewards are sold immediately
If you receive crypto staking rewards, you’d have to report their FMV at that time, taxed at income level, but if you sell them immediately, you’d have a marginal gain/loss, given that the price of the underlying assets almost didn’t significantly change, but you’d still need to report it.
Staking rewards are held
If you hold your staking rewards, you’d be taxed when you first received them, but no more taxes are due until you sell any of your holdings.