Are you confused about how to report your crypto staking earnings on your taxes?
You’re not alone. In the United States, the IRS has yet to provide clear guidance on how to treat staking income and revenue offices in most other countries are in a similar position.
That’s where tax accountants come in. They are experts in tax implications and will figure out how to report your staking income for you.
But just so that you can look over their shoulder, here’s what is known about taxation on staking income in 2022.
Staking yield is a freelance income, regardless of whether you sell or not
While the IRS does not provide specific guidelines for crypto staking taxes, it does provide rules for crypto mining and for airdrops.
- Crypto mining profits are treated as a regular income. In the USA, the tax on that crypto revenue is the same as for your freelance earnings. (IRS Notice 2014-21)
- Crypto airdrops are taxable in the same way as mining, but only if the rewarded token can be freely traded at the moment of distribution. (Revenue Ruling 2019-24)
According to Berdon LLP, this means that at least for the moment until a more specific guidance is available, staking profits should be reported as a freelance income as long as the staked cryptocurrency was openly trading on exchanges when you got it into your staking wallet.
For your staking tax report, just like it is with tax on crypto airdrops, it does not matter whether you actually sold the cryptocurrency or not. The income is still counted regardless, and that’s at the value of the token when it was distributed into your wallet.
Capital gains are only applicable if you sell
So, the tax implication of staking crypto is always an income tax, treated as a freelance income.
To this freelance income tax on your staking profits you might need to add a capital gains tax. In the United States, you only pay capital gains tax when you sell the cryptocurrency. There are two tiers, depending whether you held the crypto for at least a year or whether you sold before that mark.
If you are selling your crypto staking profits, then you are liable to pay capital gains tax on the difference between the fair price of that cryptoasset when you received it as staking yield and the price at which you sold it. A fair price can be a rate of that day as reported by Google or by Yahoo Finance.
If you decide to hold onto your staking profits, you will (legally) avoid the capital gains tax, but you still need to pay taxes on the staking income.
You need to pay staking income tax even in case the value of that crypto dropped
A widely known way to legally avoid paying capital gains tax on your crypto is to offset it with capital losses.
Staking yield is not a capital gain, though. In the US, the netting rule applies between gains and losses on capital, but you can offset 3000 USD of your ordinary income by a capital loss as well. Over that amount, there is no way to offset your income tax which at the moment includes the tax on your staking yields.
If you have a crypto portfolio, you might easily find some unrealized losses to net. But remember that in order for the IRS to accept the offset, you have to have actually sold the crypto. Unrealized losses will do you no good, tax-wise.
Last important thing to remember is that you need to consider the tax year. Any crypto transaction that you want to use on your tax report needs to be cleared before the end of the tax year.
It’s allowed to cherry pick your assets to sell at loss just before the year’s end, and this is called “tax loss harvesting”, but you cannot decide that you want to lower your last year’s capital gains in April and start selling.
Tools to help you with crypto staking tax, taxes on DeFi and taxable crypto airdrops
There are a couple of tools that help mainly with crypto taxes for traders. Those are capital gains and so these tools are mainly aiming at helping with the offset between gains and losses.
An (unlikely) tool that will be more useful for those of you who earn yields from cold staking and DeFi staking is surprisingly the Ledger wallet.
Ledger now offers a tax reporting tool called ZenLedger. It’s available from the Ledger’s Live app and it does not matter which model of Ledger you have.
Since Ledger is itself a staking wallet, the Zenledger tool reports primarily your income from mining, staking, lending, airdrops, forks and even NFT rewards that landed into your addresses within the Ledger wallet. But you can plug in your exchange logs as well.
ZenLedger is built for the US crypto taxation rules, but at the moment it can be used anywhere around world. All Zenledger does is it automatically extracts all the information about your taxable activities without any extra bookkeeping work on your end. Just have the output checked by an accountant if you’re not sure what the rules in your country are.
- Here’s more about Zenledger at the Ledger wallet blog.
You shouldn’t have too much trouble finding an accountant knowledgable in crypto anymore. The market is getting more competitive and as cryptocurrencies become more mainstream, the demand for crypto-friendly accountants will only grow.
However, it never hurts to have some independent knowledge of the process yourself, just so you can check on your accountant’s work.
That’s why we put this article together - to arm you with the basics of how crypto taxes work so that you can be knowledgeable and prepared when meeting with your accountant.