Tax season is upon us once again and if you’re unfamiliar with how Proof-of-Stake cryptocurrency works, you might have questions such as what are the taxes on cryptocurrency rewards earned via staking. Thankfully, our experts at Founder’s CPA are here to guide you every step of the way.
What Is Crypto Staking?
Crypto staking is the process by which investors can earn an income that comes in the form of crypto rewards as a result of processing and validating transactions on a blockchain. Put simply, it allows you to earn rewards for staking certain cryptocurrencies.
Some cryptocurrencies utilize a Proof-of-Stake (PoS) mechanism. Examples include Ethereum, Cosmos, Solana, Avalanche, Tezos, and Cardano, to name a few. The PoS means that you “stake” your crypto to earn a reward. It’s similar to mining in that you get selected to validate the latest transaction on the blockchain, and, in return, earn crypto. The size of your stake and the length of time that you’ve held it will impact how the network chooses validators. The more invested you are, the more you’re rewarded.
How Do You Stake?
You can stake either through a third party or through a self-custody wallet platform, such as Ledger Live. Self-custody wallets give you ownership and direct control over the private keys to your cryptocurrency. Using a third party often means that you’re using a crypto exchange or hot wallet to secure and stake your crypto in a non-custodial wallet, in return receiving staking rewards.
When you stake crypto, you will receive new coins or tokens of the same currency as your staking reward. Staking pools are slightly different; they occur when there’s a group of merged resources across coin holders. Think of it as pooling your sources together and sharing the rewards. This pool is typically operated by a pool operator and participants must lock their coins in a certain blockchain address or wallet.
How Is Crypto Staking Taxed?
The different transactions involved in staking will impact how you’re taxed; the specific transaction dictates how you are taxed in addition to where you live. The majority of the time, moving your coins to a staking pool or to a third-party staking service isn’t considered to be a taxable event.
Staking Rewards Taxes
However, if you have staking rewards, this is different. Generally speaking, staking rewards are subject to income tax that’s based on the fair market value of the coins at the point at which you get them. If you spend, trade, or sell your staking rewards, you’ll also be subject to pay a capital gains tax just as you would with any other crypto. The specifics of these taxes depend on your location and how your tax office views staking. It is best to check with your crypto tax accountant to see if these rewards may qualify as created property. If so, no tax will be due on them until sold.
How to Report Crypto Staking on Your Taxes
Although the question of “what are the taxes on cryptocurrency” is common this time of year, we hope our team could clarify some information on crypto staking taxes. If you have additional questions or you’re interested in learning more about how our team can help, contact us at Founder’s CPA today for a free consultation.