Earning passive income from staking your crypto? Congratulations — but the IRS wants their cut. Staking rewards are taxable income the moment you receive them, and many investors are surprised by how much they owe at tax time. Understanding these rules now can save you from a painful surprise later. 💰

Here is the reality. If you staked ETH, SOL, ADA, or any other proof-of-stake token and earned rewards in 2025, you owe taxes on those rewards — even if you never sold them. The IRS made this crystal clear in Revenue Ruling 2023-14. Staking rewards are ordinary income, taxed at rates up to 37%.

When I first started staking, I assumed taxes only applied when I sold. Wrong. Every reward that hits your wallet is a taxable event. If you earned 1 ETH in staking rewards when ETH was worth $3,000, you have $3,000 of taxable income — regardless of whether you sold, held, or restaked it.

This guide breaks down everything you need to know about staking taxes in 2026. From income recognition timing to cost basis tracking, reporting requirements to potential deductions — I am covering it all based on current IRS guidance and real-world experience.

💎 Staking Tax Basics — When Rewards Become Income

The IRS treats staking rewards as ordinary income. This is not capital gains — it is regular income just like your salary, freelance payments, or interest from a bank account. The tax rate depends on your total income and can reach up to 37% at the highest federal bracket.

Revenue Ruling 2023-14 settled the debate. Some investors hoped staking rewards would not be taxed until sold, similar to how unrealized stock gains work. The IRS disagreed. When you receive staking rewards and have "dominion and control" over them, you have taxable income at that moment.

Dominion and control means you can sell, transfer, or use the tokens. For most staking setups, this happens the instant rewards hit your wallet. It does not matter if the rewards are automatically restaked or locked — if you could have accessed them, they are taxable when earned.

The fair market value at the time of receipt determines your income. If you receive 0.5 ETH when ETH is trading at $4,000, you have $2,000 of ordinary income. If ETH drops to $3,000 the next day, it does not change what you owe — your income was locked in at $2,000.

📊 Staking Income vs Capital Gains Comparison

Event	Tax Type	Rate	When Taxed
Receiving staking rewards	Ordinary Income	Up to 37%	When received
Selling staked tokens (held < 1 year)	Short-term Capital Gains	Up to 37%	When sold
Selling staked tokens (held > 1 year)	Long-term Capital Gains	0% - 20%	When sold
Buying crypto with USD	Not taxable	N/A	N/A

This creates a potential double tax situation that catches people off guard. First, you pay ordinary income tax when you receive staking rewards. Then, if the token appreciates and you sell later, you pay capital gains tax on the appreciation. Two separate taxable events from one activity.

Different staking methods have the same tax treatment. Whether you stake directly on Ethereum, through a liquid staking protocol like Lido, on an exchange like Coinbase, or in a DeFi pool — the rewards are all ordinary income when received. The platform does not change the tax rules.

Liquid staking tokens add complexity. When you stake ETH through Lido and receive stETH, you are not receiving income at that moment — it is just a representation of your staked position. The taxable income occurs as your stETH balance grows from rewards. Track the daily or periodic increases carefully.

⚡ Staking rewards are taxable when received!
👇 Check the official IRS ruling

📌 IRS Revenue Ruling 2023-14

The official IRS guidance on staking reward taxation.

🔍 View IRS Ruling

📅 When Is Staking Income Recognized?

The timing of income recognition depends on when you gain dominion and control over the rewards. This varies based on your staking method and platform. Getting this right is crucial for accurate tax reporting and avoiding IRS issues.

For direct staking on proof-of-stake networks, income is recognized when rewards are credited to your wallet. If you run an Ethereum validator, each attestation reward and block proposal reward becomes income the moment it appears in your validator balance and you can withdraw it.

Exchange staking typically credits rewards daily or weekly. Coinbase, Kraken, and other exchanges show your staking rewards in your account history with specific dates and amounts. Each credit is a separate taxable event at the fair market value on that day.

Locked staking periods create a gray area. If your tokens and rewards are completely locked with no ability to withdraw, some argue income should not be recognized until unlocking. However, the IRS has not provided clear guidance on this, so the conservative approach is to recognize income as rewards accrue.

🗓️ Income Recognition by Staking Method

Staking Method	Income Recognition	Tracking Difficulty
Exchange (Coinbase, Kraken)	When credited to account	Easy — clear records
Direct Validator (ETH)	When rewards hit validator	Medium — need tracking
Liquid Staking (Lido, Rocket Pool)	As token balance increases	Hard — daily tracking
DeFi Pools	When claimed or auto-compounded	Hard — complex tracking
Locked Staking	Unclear — likely when accrued	Medium

Auto-compounding adds another layer of complexity. If your staking rewards are automatically restaked, each compounding event is still a taxable event. You receive income (the reward), and then you make a new investment (restaking). Both happen simultaneously but are separate for tax purposes.

Track rewards in real-time or use tax software. With potentially hundreds of small reward events per year, manual tracking is nearly impossible. Crypto tax software like CoinTracker, Koinly, or TaxBit can connect to your wallets and exchanges to automatically calculate staking income.

Keep records of the fair market value at each reward event. You need the exact price of the token at the moment you received each reward. Most tax software handles this automatically, but if tracking manually, use a consistent price source like CoinGecko or CoinMarketCap.

📌 Need help tracking staking rewards?

See our comparison of the best crypto tax software for 2026.

🔍 Best Crypto Tax Software 2026

💵 Staking Tax Rates — Ordinary Income vs Capital Gains

Staking rewards are taxed as ordinary income at your marginal tax rate. This is often higher than capital gains rates, which is why staking can have a bigger tax bite than simply holding and selling crypto. Understanding the rate difference helps with tax planning.

Federal ordinary income rates for 2026 range from 10% to 37% depending on your total taxable income. If you are in the 24% bracket, your staking rewards are taxed at 24%. Add state income tax in many states, and your effective rate can exceed 30% easily.

Compare this to long-term capital gains rates of 0%, 15%, or 20%. If you simply bought ETH and held it for over a year before selling, your maximum federal rate would be 20%. But staking rewards face up to 37% — almost double the rate for the same underlying asset.

Net Investment Income Tax adds 3.8% for high earners. If your modified adjusted gross income exceeds $200,000 (single) or $250,000 (married filing jointly), NIIT applies to your staking income. Your effective federal rate could reach 40.8% before state taxes.

💰 2026 Tax Rate Comparison

Income Type	Tax Rate	$10K Income Example
Staking Rewards (Ordinary Income)	10% - 37%	$1,000 - $3,700
Short-Term Capital Gains	10% - 37%	$1,000 - $3,700
Long-Term Capital Gains	0% - 20%	$0 - $2,000
NFT Collectibles (Long-Term)	Up to 28%	Up to $2,800

The timing mismatch creates cash flow challenges. You owe taxes on staking rewards when received, based on the value at that time. If the token price crashes before you sell, you still owe taxes on the higher value — but you might not have the cash to pay. This is called "phantom income."

Consider selling some rewards to cover taxes. A common strategy is to sell enough of each staking reward to cover the estimated tax liability. If you are in the 30% bracket, sell 30% of rewards immediately and hold the rest. This ensures you always have cash for taxes.

State taxes vary significantly. California, New York, and New Jersey add over 10% on top of federal rates. Texas, Florida, and Wyoming have no state income tax. Your location dramatically affects your total staking tax burden. Some investors relocate specifically for crypto tax benefits.

📌 Planning your crypto taxes for 2026?

Check out our complete tax planning guide with strategies to minimize your burden.

🔍 2026 Crypto Tax Planning Guide

🧮 Cost Basis and Future Sales

When you receive staking rewards, the fair market value becomes your cost basis in those tokens. This is important because when you eventually sell, you only pay capital gains tax on the appreciation above your cost basis — not the entire sale amount.

Here is how it works with real numbers. You receive 1 ETH as a staking reward when ETH is worth $3,000. You report $3,000 as ordinary income and pay taxes on it. Your cost basis in that 1 ETH is now $3,000. If you later sell when ETH is $5,000, you have a $2,000 capital gain — not $5,000.

Without proper cost basis tracking, you could pay double taxes. If you forget to establish cost basis when receiving rewards, you might accidentally report the entire sale as capital gains later. The IRS would essentially tax you twice on the same money. Accurate records prevent this.

Each staking reward has its own cost basis and holding period. If you receive rewards daily for a year, you have 365 different tax lots, each with its own basis and acquisition date. Selling requires tracking which specific lots you are disposing of.

🧾 Staking Reward Cost Basis Example

Date	ETH Received	Price	Income / Cost Basis
Jan 15, 2025	0.1 ETH	$3,000	$300
Feb 15, 2025	0.1 ETH	$3,500	$350
Mar 15, 2025	0.1 ETH	$2,800	$280
Total	0.3 ETH	—	$930

Choose a cost basis method and stick with it. FIFO (First In, First Out) sells your oldest tokens first. LIFO (Last In, First Out) sells your newest first. Specific identification lets you choose which lots to sell. Each method produces different tax results.

FIFO is the default and usually creates longer holding periods. If you have been staking for over a year, FIFO would sell your oldest rewards first, potentially qualifying for long-term capital gains rates. This can significantly reduce your tax on the sale.

Specific identification offers the most flexibility. You can strategically choose to sell high-basis lots first to minimize gains, or sell lots held over a year to get long-term treatment. This requires detailed records but can save substantial taxes.

If prices drop below your cost basis, you have a capital loss. Using the earlier example, if you received 1 ETH at $3,000 cost basis and sold when ETH dropped to $2,000, you have a $1,000 capital loss. This loss can offset other capital gains or up to $3,000 of ordinary income annually.

📌 Understanding crypto cost basis methods?

Learn how FIFO, LIFO, and specific ID affect your tax bill.

🔍 Crypto Cost Basis Guide

📝 How to Report Staking Rewards

Reporting staking income correctly is essential to avoid IRS issues. The exact forms depend on whether you stake as an individual investor or as a business. Most people report on Schedule 1, but active stakers may need Schedule C.

For individual investors, report staking income on Schedule 1 (Form 1040), Line 8z as "Other Income." Write "Staking Rewards" in the description field. The total amount should be the sum of all staking rewards received during the year, valued at fair market value when received.

When you sell staked tokens, report the sale on Form 8949 and Schedule D. List each sale with the date acquired (when you received the reward), date sold, proceeds, cost basis, and gain or loss. If you have many transactions, you can attach a summary statement.

Starting in 2026, expect Form 1099-DA from exchanges. Under new IRS reporting requirements, US exchanges must report your staking income on the new Form 1099-DA. This form will show total staking rewards received, making it easier to report but also harder to hide unreported income.

📋 Staking Tax Reporting Checklist

Form	Purpose	When to Use
Schedule 1, Line 8z	Report staking income	Individual investors
Schedule C	Report staking as business	If staking is your trade/business
Form 8949	Report sales of staked tokens	When you sell staking rewards
Schedule D	Summarize capital gains/losses	When you sell any crypto
Form 1040, Page 1	Answer crypto question	Everyone with crypto activity

Do not forget the crypto question on Form 1040. The first page asks if you received, sold, exchanged, or otherwise disposed of any digital assets. If you received staking rewards, the answer is "Yes" — even if you did not sell anything. Answering incorrectly is a red flag for audits.

Quarterly estimated taxes may be required. If your staking income is substantial and you expect to owe $1,000 or more in taxes, you must make quarterly estimated payments. Due dates are April 15, June 15, September 15, and January 15. Missing payments triggers penalties and interest.

Keep detailed records for at least seven years. Store documentation of every staking reward: date received, amount, fair market value, transaction hash, and the platform used. If audited, you need to prove your reported income and cost basis are accurate.

📌 New 1099-DA form coming in 2026!

Learn what exchanges will report to the IRS about your crypto.

🔍 1099-DA Guide 2026

💼 Staking Deductions and Business Treatment

If staking is a regular business activity for you, there are potential deductions that can reduce your taxable income. The key question is whether your staking rises to the level of a trade or business versus passive investment activity.

Running a validator node is more likely business activity. If you operate Ethereum validators, actively manage staking operations, invest significant time and resources, and depend on staking income, the IRS may view this as a trade or business. This triggers Schedule C filing but also allows business deductions.

Passive staking on exchanges is typically investment activity. If you simply deposit tokens on Coinbase and collect rewards without active involvement, this is probably not a business. You report on Schedule 1 and cannot claim business deductions — but you also avoid self-employment tax.

Self-employment tax is the downside of business treatment. If your staking is a business, you owe approximately 15.3% SE tax on net earnings in addition to income tax. For large staking operations, this can add up to significant additional tax burden.

💻 Potential Staking Business Deductions

Expense	Examples	Typical Annual Cost
Hardware	Validator server, GPU, storage	$2,000 - $10,000
Electricity	Power for validator equipment	$500 - $2,000
Internet	High-speed connection	$600 - $1,200
Cloud Services	AWS, hosting for nodes	$1,200 - $5,000
Software	Tax software, monitoring tools	$200 - $1,000
Home Office	Dedicated workspace	Up to $1,500

Gas fees for claiming or managing stakes may be deductible. If you pay ETH gas fees to claim rewards, unstake tokens, or manage your positions, these could be investment expenses or business expenses depending on your situation. Track them carefully.

Slashing losses are deductible. If your validator gets slashed and you lose staked tokens, this is a deductible loss. It is essentially a casualty loss from your staking business. Document the slashing event thoroughly with blockchain evidence.

Consider entity structure for large operations. If your staking generates significant income, forming an LLC or S-Corp may provide tax benefits. An S-Corp election can reduce self-employment tax by allowing you to split income between salary and distributions. Consult a tax professional for your specific situation.

📌 Worried about IRS audits?

Learn the red flags that trigger crypto tax audits and how to avoid them.

🔍 IRS Audit Red Flags 2026

📚 Related Articles

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• NFT Tax Guide 2026 — Collectibles 28% Rate Explained

• Crypto Wash Sale Rules 2026

• Best Crypto Tax Software 2026

• IRS Crypto Audit Red Flags 2026

❓ FAQ

Q1. Are staking rewards taxed when received or when sold?

A1. Staking rewards are taxed as ordinary income when you receive them and have dominion and control over them. You owe taxes at the fair market value on the date of receipt — even if you never sell. When you later sell, you may owe additional capital gains tax on any appreciation above your cost basis.

Q2. What tax rate applies to staking rewards?

A2. Staking rewards are taxed as ordinary income at your marginal tax rate, which ranges from 10% to 37% federally. High earners may also owe 3.8% Net Investment Income Tax. Add state taxes where applicable. This is typically higher than long-term capital gains rates of 0-20%.

Q3. Do I owe taxes if I immediately restake my rewards?

A3. Yes. Auto-compounding or immediately restaking does not change the tax treatment. You receive income (taxable), then make a new investment (restaking). Both happen simultaneously but are separate events for tax purposes. You owe ordinary income tax on the reward amount.

Q4. How do I track staking rewards from liquid staking like Lido?

A4. Liquid staking tokens like stETH increase in balance as rewards accrue. You need to track the daily or periodic increases to calculate your taxable income. Crypto tax software can help automate this. Each balance increase is a separate taxable event at the fair market value at that time.

Q5. Can I deduct expenses related to staking?

A5. If your staking rises to the level of a trade or business (like running validator nodes), you can deduct expenses like hardware, electricity, internet, and cloud services on Schedule C. Passive staking on exchanges typically does not qualify for business deductions. Consult a tax professional for your situation.

Q6. What if the token price drops after I receive staking rewards?

A6. You still owe taxes on the value when received — this is called phantom income. However, if you later sell at a loss below your cost basis, you can claim a capital loss. This loss can offset capital gains or up to $3,000 of ordinary income annually, with excess carrying forward.

Q7. Will I receive a 1099 for staking rewards?

A7. Starting in 2026, US exchanges must report crypto transactions including staking rewards on the new Form 1099-DA. You should receive this form by January 31 for the previous tax year. Even without a 1099, you are still required to report all staking income.

Q8. Is there any way to defer taxes on staking rewards?

A8. Limited options exist. Staking within a self-directed IRA or Solo 401(k) can defer taxes until withdrawal, but setup is complex and has restrictions. Some argue that rewards locked without withdrawal ability should not be taxed until accessible, but the IRS has not confirmed this position. Most staking is taxable when received.

⚠️ Disclaimer

This content is for informational purposes only and does not constitute tax, legal, or financial advice. Tax treatment varies based on individual circumstances. Consult a qualified CPA, tax attorney, or tax professional for advice specific to your situation. IRS guidance may change, and the information here is based on current published rules as of December 2025.

Sources: IRS Revenue Ruling 2023-14, IRS Virtual Currency FAQ, IRS Publication 550, IRS Schedule C Instructions

Last Updated: December 27, 2025 | Author: Davit Cho | LinkedIn

Tags: Crypto Staking Taxes, Staking Rewards Tax, Proof of Stake Tax, ETH Staking Tax, Ordinary Income Crypto, IRS Staking Guidance, DeFi Tax, Liquid Staking Tax, Validator Tax, Crypto Tax 2026

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