Are Staking Rewards Taxed Twice? What the IRS Actually Says (and the Lawsuit Trying to Change It)
The IRS treats crypto staking rewards as ordinary income the moment you can control them, then taxes any gain again when you sell — a two-event rule that's currently being challenged in federal court and in a pending bill. How the rule actually works, with a worked example.
If you’re staking crypto and only thinking about tax when you eventually sell, you’re missing a step the IRS considers separate and mandatory. Under current US guidance, staking rewards are taxed twice: once as ordinary income the moment you receive them, and again as a capital gain or loss when you later sell them. Skipping the first event is one of the more common, and more expensive, mistakes in crypto tax filing right now — and it’s a mistake even if the reward is still sitting untouched in your wallet.
This isn’t a settled, uncontroversial rule, either. It’s currently being challenged in a live federal lawsuit and targeted by a bill sitting in Congress. Here’s how the rule actually works today, why it’s contested, and what to do about it while the fight continues.
This is general educational information, not tax advice. Staking tax treatment is genuinely unsettled at the margins and jurisdiction-specific everywhere. Confirm your situation with a professional before filing.
The rule: two separate taxable events
The IRS laid this out in Revenue Ruling 2023-14, released July 31, 2023. The holding is narrow but consequential: a cash-method taxpayer who stakes crypto and receives additional tokens as a reward must include the fair market value of those tokens in gross income in the year they gain “dominion and control” over them — meaning the ability to sell, exchange, or otherwise transfer the reward, whether or not they actually do any of those things.
That’s event one. Event two happens later, whenever you actually sell or trade the reward tokens: you owe capital gains tax (or get a capital loss) on the difference between the sale price and the fair market value you already reported as income when you received it. That FMV-at-receipt figure becomes your cost basis for the reward tokens going forward.
The legal reasoning behind this is old and well-established outside of crypto: the IRS is applying the “accession to wealth” doctrine from Commissioner v. Glenshaw Glass (1955) — the general principle that any clearly realized gain, from whatever source, counts as taxable income unless a specific exception applies. The ruling treats a staking reward the same way it would treat interest credited to a savings account or a bonus paid in a company’s own stock: you owe tax on it when you get it, at what it was worth then.
A worked example
Say you stake 10 ETH through a validator and receive 0.3 ETH in rewards over the year, credited to your wallet in small increments you’re free to move or sell at any time. ETH is trading at $2,500 when you receive the rewards.
- Event one, this tax year: You report $750 (0.3 ETH × $2,500) as ordinary income, taxed at your regular income tax rate — not the more favorable long-term capital gains rate, regardless of how long you hold the underlying staked position.
- Your new cost basis in that 0.3 ETH is now $750.
- Event two, whenever you sell: Say ETH rises to $3,500 and you sell the 0.3 ETH. Your proceeds are $1,050. Your taxable capital gain is $1,050 − $750 = $300, taxed under normal capital gains rules (short- or long-term depending on how long you held it after receipt).
- If instead ETH had fallen to $1,500 when you sold, you’d have proceeds of $450 against a $750 basis — a $300 capital loss, which follows the same offset rules covered in Tax-Loss Harvesting for Crypto.
The part people miss isn’t the math — it’s that the first $750 is owed as ordinary income in the year you received the reward, even if you never sold a single token and the position later went underwater. A wallet full of unsold staking rewards that have since dropped in value can still carry a real tax bill from the year they arrived.
Why this is being fought in court right now
The IRS’s position isn’t unchallenged. The core counter-argument, made by Tennessee taxpayer Josh Jarrett over Tezos staking rewards, is that newly created tokens are more like newly created property than income received from someone else — closer to a farmer’s harvested crop or a manuscript an author has written, neither of which is taxed until sold, not compensation paid to you by a third party the moment it’s credited.
Jarrett’s first suit, over his 2019 rewards, was mooted when the IRS issued him a refund he refused to cash specifically to keep the legal question alive — a maneuver the Sixth Circuit ultimately treated as making the case moot anyway, dismissing it in August 2023. He filed again in October 2024 over his 2020 tax year rewards (~$32,000 of new Tezos tokens), a case that remains active in the Middle District of Tennessee as of this writing, docket 3:24-cv-01209. The government’s position in that case is built directly on Revenue Ruling 2023-14, which post-dates Jarrett’s original rewards but reflects the IRS’s settled current view.
Separately, in June 2026, Rep. Mike Carey introduced H.R. 9175, the Tax Clarity for Mining and Staking Act, which would legislatively overturn the current rule by deferring tax on mining and staking rewards until the taxpayer actually sells them — functionally adopting the position Jarrett is arguing in court. As of this writing the bill is pending in the House Ways and Means Committee and has not been enacted.
None of this changes what you owe today. Revenue Ruling 2023-14 remains the IRS’s operative position unless and until a court overturns it or Congress passes something like H.R. 9175. Filing as if the pending challenge has already succeeded is a bet on an outcome that hasn’t happened yet.
Current rule vs. what the pending bill would change
| Current IRS rule (Rev. Rul. 2023-14) | H.R. 9175, as introduced | |
|---|---|---|
| When is the reward taxed? | Ordinary income at receipt (dominion and control) | Deferred until you sell |
| Tax rate on the reward itself | Your ordinary income rate | Capital gains rate, applied only at sale |
| Cost basis of reward tokens | Fair market value at receipt | Presumably zero or acquisition-cost based, pending final bill text |
| Number of taxable events per reward | Two — income at receipt, gain/loss at sale | One — gain/loss at sale |
| Current legal status | Binding IRS guidance, in effect now | Pending in House Ways and Means Committee, not law |
The liquid staking and restaking gap
Plain validator staking is the case Revenue Ruling 2023-14 actually addresses. It says nothing specific about liquid staking — depositing ETH into a protocol like Lido and receiving a liquid staking token (stETH) that represents your staked position and accrues rewards — or restaking protocols like EigenLayer that layer additional yield and risk on top of an already-staked position.
This is a real, current guidance gap, not a minor technicality. Two questions sit unanswered:
- Is swapping ETH for stETH itself a taxable disposal of the ETH, the way trading one crypto for another normally is? A conservative reading says yes. Common practice in the industry treats it as a non-taxable representation of the same economic position — but that’s an interpretation, not an IRS ruling.
- How is the ongoing yield itself taxed — as it accrues to the token’s value, or only when you unstake and realize it? Practitioners generally treat the yield as ordinary income when it’s realized in a way you control, similar to base staking, but the mechanics differ by protocol and haven’t been specifically addressed.
If you’re using a liquid staking or restaking protocol, don’t assume either treatment applies by default — this is exactly the kind of open question worth raising directly with a crypto-literate tax professional rather than guessing, and it’s worth revisiting as guidance develops.
What to actually do right now
- Track the fair market value of every reward at the moment you receive it, not just your later sale price. This is the number that determines your income tax bill for that year and your cost basis going forward — see The Records You Actually Need to Claim a Capital Loss for the general recordkeeping discipline this requires.
- Report under current law, not the outcome you’re hoping for. Filing as though the Jarrett case or H.R. 9175 has already changed the rule, when neither has, is a materially different risk than following current guidance and adjusting later if the law changes.
- Separate the two tax events in your own records. A reward that’s since dropped in value can still have generated a real income tax bill in the year you received it — don’t let a later paper loss on the position obscure the fact that the first event already happened and needs to be reported.
- Get specific advice for liquid staking or restaking positions. The plain-staking rule in Revenue Ruling 2023-14 doesn’t cleanly map onto these structures, and treating them as identical is a guess, not a settled answer.
- Watch this space, but don’t file around a prediction. Both the litigation and the bill are genuinely live as of this writing — worth tracking, not worth pre-empting on your return.
FAQ
Do I owe tax on staking rewards I haven’t sold yet? Under the IRS’s current position (Revenue Ruling 2023-14), yes — the fair market value of the reward is ordinary income in the year you gain “dominion and control” over it, meaning the ability to sell, transfer, or otherwise use it, regardless of whether you actually do. Not selling doesn’t defer this first tax event; it only affects the second one, when you eventually dispose of the tokens.
What if I disagree with this rule — can I just report it the way the pending lawsuit argues it should work? You can, but understand what you’re actually doing: filing against the IRS’s published position on a ruling that remains in effect while litigation continues. The taxpayers in the ongoing case are doing exactly that deliberately, as a legal challenge, with legal representation built around it. Filing the same way without intending to litigate if challenged is a materially different risk than following current guidance and amending later if the law changes in your favor.
Does this rule apply the same way to liquid staking, like depositing ETH into Lido and getting stETH back? This is a genuine gap — the IRS has not issued specific guidance on liquid staking or restaking tokens. Practitioners are split: a conservative reading treats swapping ETH for a liquid staking token as a taxable disposal of the ETH, while a more common practical approach treats it as a non-taxable representation of the same underlying position, taxing only the yield itself as ordinary income when received. Neither view has been blessed by the IRS. Get advice specific to the exact protocol and mechanism you’re using rather than assuming either answer by default.
Is this a US-only issue? The specific ruling and lawsuit described here are US federal tax matters and don’t directly apply if you file elsewhere. But the underlying question — is a newly created reward taxed when you receive it, or only when you sell it — comes up in other jurisdictions’ crypto tax frameworks too, sometimes with a different answer. Check your own jurisdiction’s specific staking guidance rather than assuming the US rule, or its opposite, applies to you.