Summary
- A technology-neutral approach is critical to supporting innovation and domestic industry expansion. Staking is a novel activity. While it shares strong corollaries with existing activities governed by the tax code, the novelty of staking as an activity and its economic importance requires some reconciliation of the existing rules.
- The House Ways and Means Committee is expected to announce that it will mark up its package of digital asset tax bills this week. Two things any digital asset tax package should get right about taxation of staking are sourcing and timing.
- Our new report explains how staking works, what staking rewards are, and identifies the core tax issues at stake.
Today CCI is publishing Securing the Future of Digital Finance Infrastructure, a report on how the United States taxes staking rewards and what that treatment costs the country in infrastructure, talent, and capital.
The report is timely, with the House Ways and Means Committee marking up its package of digital asset tax bills this week. The report examines two staking taxation issues that any legislation should address: when staking rewards should be taxed, and where that income should be sourced.
Staking is infrastructure
Proof-of-stake networks are secured by validators who commit assets and verify transactions. Over $386 billion in value is secured this way, underpinning stablecoins, tokenized money market funds, digital identity pilots with state and federal agencies, and decentralized telecommunications networks serving millions of users.
Staking rewards are the mechanism that secures all of this value and keeps proof-of-stake networks operational and secure. They are not bank interest, stablecoin reward payments, or cloud servers. They are newly created units of a network’s own token, allocated programmatically by protocol rules that no individual controls.
Timing
Staking rewards should be taxed at disposition, with gains realized at the time of sale. Today, a validator owes ordinary income tax the moment staking rewards are issued – not at the time when value is realized. Taxing tokens at receipt, when tokens may still be locked, non-transferable, and exposed to slashing, creates a liability against an asset the taxpayer cannot sell, at a price they cannot lock in.
Any proposed bill should also not create a deferral clock. Forcing recognition after a fixed period creates a tax event with no sale, and requires taxpayers and the IRS to track deferral windows across thousands of individual reward events. New complexity, same underlying problem.
Sourcing
With no statutory rule, practitioners default to where validator hardware sits, which can trigger 30% withholding on foreign investors using U.S. validators. Institutions have responded by requiring validators be hosted outside the U.S. A majority of validators on the largest proof-of-stake networks now operate offshore. That exports engineering jobs and capital expenditure — and U.S. visibility into networks American institutions rely on. This should be fixed by sourcing to the residence of the taxpayer.
A complete package should add a clear rule that passive staking is not a trade or business, plus fixes for investment trust status and the §7704 qualifying income test.
Read the full report: Securing the Future of Digital Finance Infrastructure.
