Check out this article published in the September/October issue of Az Business Magazine. The article appears as part of the Magazine's "Ask an Attorney" column.
Question: How is cryptocurrency treated for federal tax purposes?
Answer: For tax purposes, courts treat money as a “medium of exchange” that measures the value of property we give or acquire in a transaction rather than as property for federal tax purposes. (See Wisconsin Central v. United States, 138 S. Ct. 2067 (2018)). Courts however treat cryptocurrency as property, not as money. (See Kim v. Commissioner, T.C. Memo. 2023-91; Stashny v. Commissioner, T.C. Memo 2020-82).
Question: When a taxpayer receives staking rewards, how are they taxed?
Answer: Staking rewards are cryptocurrency that taxpayers receive either verifying cryptocurrency transactions that result in the issuance of new cryptocurrency units, or by actively using their existing tokens to verify new tokens (“mining”) or pledging their existing cryptocurrency tokens to verify new tokens (“staking”). In either case, when proper verification of new tokens occurs, the taxpayer receives new cryptocurrency tokens for participating in the verification process. In its recent opinion (Paschall v. Commissioner, T.C. Memo 2026-46), the U.S. Tax Court determined that staking rewards constitute current income when issued because the new tokens had value independent of the original tokens already owned by the taxpayer, over which the taxpayer had dominion and control upon receipt. The court rejected the taxpayer’s various arguments that taxation of staking rewards should be postponed until they were sold. The Court rejected taxpayers’ analogy to stock dividends because, unlike stock dividends, staking rewards represented new value, not just a spreading of the value that the taxpayer already owned over a greater number of units. The court found that “the distribution of staking rewards from a fixed supply increased both the proportion and the value of taxpayer’s interest in the cryptocurrency company.” Likewise, the Court rejected the notion that staking rewards were self-created property, finding that “[s]takers do not create anything by themselves. Instead, the staked tokens validate transactions on the blockchain. In exchange for validation the cryptocurrency’s protocol grants stakers additional tokens. The stakers are not the ones who created them.”
Question: How reliable is IRS guidance about cryptocurrency taxation?
Answer: An important aspect of the Paschall case was that the Court refused to decide the case using Internal Revenue Service guidance. Rather the court referenced foundational principles of tax law finding that staking rewards constituted an accretion to wealth taxable pursuant to section 61 of the Internal Revenue Code. Consistent with the U.S. Supreme Court’s decision in Loper Bright Enterprises v. Raimondo, 144 S. Ct. 2244, which denied deference to agency decisions generally. The Court sidestepped the IRS cryptocurrency guidance in Revenue Ruling 2023-14, and referring directly to Internal Revenue Code section 61 and Commissioner v Glenshaw Glass Co., 348 U.S. 426, (1955), asserted its constitutional privilege to directly interpret historical precedent and statutes, perhaps foreshadowing a significant step towards renewed judicial independence and discretion in interpreting U.S. tax laws.
About the Author
Otto Shill helps individuals, business owners, and employers comply with and plan for laws and regulations related to federal and state taxation, employee benefits, and executive compensation. Recognized as a Certified Tax Specialist by the State Bar of Arizona's Board of Legal Specialization, Otto assists clients with audits, investigations, and regulatory disputes related to these areas and advises business owners on various transactions and long-term succession and estate planning.