Crypto staking is becoming more mainstream as leading digital currencies such as Ethereum turn to Proof-of-Stake (PoS) while many other protocols offer staking rewards for their holders.
Staking can be a great way to generate passive income on your holdings, while many tools even offer flexible locking periods. It sounds good, but as always, there are tax implications to consider when staking your crypto.
Today, we cover all the taxes involved when receiving crypto staking rewards as an individual and as a business in the US and the UK.
The best crypto staking platforms
When you stake crypto, you’re locking your funds into an investment vehicle that returns a yield per year based on rewards. Coins that run under a Proof-of-Stake protocol allow you to lock funds, contribute to the network, and gain rewards. Crypto staking is becoming more popular as Ethereum 2.0 comes to life, while users will be able to lock at least 32 ETH into the platform and generate rewards.
Other popular cryptocurrencies as Cardano or Tezos are popular staking alternatives. If you have an account on a popular crypto exchange, you’ll also be able to stake from your wallet various cryptocurrencies with different yields and periods. For example, Binance offers flexible locking periods, allowing you to make shorter-term staking investments.
Beyond exchanges, you’ll find many staking-as-a-service platforms with various options and yields where you can start your staking journey.
Is crypto staking taxable in the US?
Receiving staking rewards is a taxable event in the U.S, similar to receiving interest from your crypto from comparable investment vehicles. When you receive staking rewards, you need to assess its Fair Market Value (FMV) in USD and recognize ordinary income in that amount.
When to determine that you received your staking rewards?
If you use crypto tax software like CoinTracking, you can get the FMV automatically when importing your transactions. As with a crypto airdrop, you will only be responsible for the staking rewards and have tax obligations if you receive them on your wallet and are in full control of them. Once you get the staking rewards, you need to report them as ordinary income, based on their FMV at the time of receipt.
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Do I pay taxes if I later sell the staking rewards I earned?
If you receive 0.5 ETH from staking, you’ll have to report the Fair Market Value (FMV) when you receive it. The staking rewards contribute to your overall ordinary income, which you’ll pay income tax (rate depends on your tax bracket and other factors). The same FMV amount will also become your cost basis in the coin you received from staking. If you later sell that 0.5 ETH, you’ll need to recognize a capital gain or loss.
In the U.S, all crypto-to-FIAT or crypto-to-crypto trades are taxable events. As a result, if you sell you 0.5 ETH for USD or another crypto, you’ll need to report a capital gain/loss when you file your tax return for the year.
If you hold that 0.5 ETH for longer than 12 months, you’ll be subject to a long-term capital gains tax rate, ranging from 0% to 20%, depending on your filing status and other factors. On the other hand, if you sell it before you hold it for 12 months or less, you’ll be subject to a short-term capital gains tax rate, ranging from 10% to 37%, depending on several factors.
How to report crypto staking on taxes?
When you invest in crypto in the U.S, you have a series of crypto tax reporting obligations. When you receive staking rewards, you need to report those transactions on your income tax return.
If you later sell the crypto you received from staking, you’ll have to report all individual trades on Form 8949 and Schedule D of your Form 1040 after determining the gain/loss on each trade.
Do I pay taxes on liquid-staked tokens?
Currently, the IRS (US) has no official guidance for the tax treatment of liquid staked tokens. If you don’t have access to the appropriate information to determine your income amount, you could assume that you don’t need to recognize a taxable event. We could assume the same lack of reporting obligation if you do not have a guaranteed right for the token granted to you.
Do I pay taxes if I run a staking business?
If you have a staking business in the US, you’ll have to pay income tax on the total amount you earned from staking.
Can I deduct staking equipment for taxes?
If you run a staking business in the US, similar to a Bitcoin mining business, you can deduct large upfront equipment costs like staking equipment. Moreover, your running costs as electricity can also be tax-deductible, lowering your tax bill in the end.
However, if you stake as an individual, you cannot claim tax deductions on those costs because investment expenses for individual taxpayers are not deductible under the current tax law.
Crypto staking taxes: US Tax simulation
1. Marie invests 10 ETH in staking, earning 10% in USDC.
Marie uses a staking-as-a-service platform for her ETH. This particular service is offering 10% in USDC per year in staking rewards. In January 2021, Marie invested her 10 ETH when 1 ETH was $1000.
2. Marie receives the USDC staking rewards.
In June 2021, Maries received her staking rewards in USDC. She received 416.66 USDC for the five months she staked her 10 ETH. Let’s assume that 1 USDC is $1.01.
3. Marie pays income taxes for her crypto staking.
In June 2021, Marie needs to recognize the Fair Market Value (FMV) in USD from the USDC she received in staking rewards as income. As a result, Marie needs to recognize $420.83 (416.66 USDC * $1.01) in ordinary income, and she’ll have to report it on her income tax return.
4. Marie sells her USDC staking rewards.
In November 2021, Marie decides to sell her USDC for USD to have enough liquidity to pay for crypto taxes in 2022. Let’s assume that 1 USDC is now $1.02. She receives $424.99 in USD.
5. Marie pays capital gains tax for her USDC to USD trade.
Even though the capital gain in the last trade is very small, Marie still needs to determine its gain and report the trade. The gain for this trade is $4.16 ($424.99 – $420.83). Since Marie is selling her USDC before holding it for 12 months, the capital gains tax will be a short-term rate, ranging from 10% to 37%.
Marie will need to report the trade and pay taxes on the capital gains when she files her tax return for the year.
Is crypto staking taxable in the UK?
Recently, the HMRC provided new clarification on the issues of crypto staking for individuals and businesses. When “the activity does not amount to a trade, the pound sterling value (at the time of receipt) of any tokens awarded will be taxable as income (miscellaneous income).“
If you later sell the rewards, you may be subject to capital gains tax. The HMRC classifies it as a trade if it meets certain conditions: Degree of activity, organisation, risk, and commerciality.
*This post is part of the Crypto Taxes AMA series (US). Follow our weekly AMAs on Twitter where our expert CPA, Sharon Yip answers your crypto tax questions. You can download 25+ AMA crypto tax reports for free.