Staking involves holding cryptocurrency in a wallet for a period to support the network and verify transactions. In exchange, stakers receive rewards in the form of additional cryptocurrencies. Cryptocurrency staking taxes can be complicated and confusing.
This comprehensive guide will allow investors to avoid potential implications related to crypto staking taxes from the IRS and other countries’ tax authorities. It will focus on why staking fees are taxed, how they are taxed, the differences between PoS and DeFi staking, how to calculate staking rewards, and crypto staking in different countries.
Why Are Staking Rewards Taxable?
Staking rewards are taxable because they are considered income by most tax authorities. When you stake your cryptocurrency, you are essentially locking it up for a period of time and contributing to the network’s security and functionality. In return for this contribution, you receive rewards in the form of additional cryptocurrency.
Staking rewards are treated like any other form of income. Therefore, they are subject to income tax in most countries. However, the same tax treatment of staking rewards may vary depending on your country and the specific rules and regulations that apply to you.
How Is Сrypto Staking Taxed?
When you stake your cryptocurrency and receive rewards, the value of those rewards is considered taxable income by the tax authorities in most countries. The same tax treatment will depend on the laws and regulations in your country. Still, in general, you will need to report your staking rewards as income on your tax return and pay taxes on the amount of income earned.
Now, when you incur capital gains or losses when you dispose of the asset, which includes:
- selling your cryptocurrency;
- exchanging it for another cryptocurrency;
- using it to pay for a purchase.
For instance, Daniel earns $350 worth of TRX as a staking reward, and the price of the coins appreciates to $420, and you sell it. As a result, Daniel recognizes an income tax of $350 and a capital gain tax of $70.
To properly report your staking rewards on your tax return, you will need accurate records of your staking activities, which include:
- the amount of cryptocurrency staked;
- the day you received your rewards;
- the duration of the staking period;
- the date you disposed of your asset (if you did);
- your wallet address;
- the fair market value of your cryptocurrency at purchase and sale, etc.
Difference Between PoS and DeFi Staking
Here’s a table outlining some of the key differences between Proof of Stake (PoS) and Decentralized Finance (DeFi) staking:
|Category||Proof of Stake (PoS)||Decentralized Finance (DeFi)|
|Definition||A consensus mechanism in which validators are chosen to validate transactions based on the amount of cryptocurrency they stake||A set of financial applications and protocols built on blockchain technology that allows users to lend, borrow, and trade cryptocurrencies|
|Purpose||To secure the blockchain network and validate transactions||To provide financial services and applications that are decentralized and accessible to anyone|
|Rewards||Validators earn rewards for validating transactions and securing the network||Users earn rewards for providing liquidity to DeFi protocols or staking their tokens|
|Staking requirements||Validators must hold a minimum amount of cryptocurrency to participate in staking||Users typically need to provide liquidity to DeFi protocols or stake their tokens to participate|
|Risk||Validators are at risk of losing their staked cryptocurrency if they fail to validate transactions properly||Users may face risks associated with smart contract vulnerabilities, liquidity risks, and price volatility|
|Examples||Ethereum, Cardano, Tezos||Uniswap, Compound, Aave|
It’s worth noting that while there are some key differences between PoS and DeFi staking, both types of staking involve users contributing to the blockchain ecosystem and earning rewards in return.
How to Calculate Staking Rewards
The amount of staking rewards you receive may vary depending on factors such as the specific cryptocurrency being staked, the duration of the staking period, the fees associated with staking, and any changes in the staking reward rate over time. And all these affect how the rewards are calculated.
Here are some general steps that can help you calculate staking rewards:
- Determine the staking reward rate. The staking reward rate is the percentage of the asset rewarded to stakers, typically found on the project’s website. This rate can vary depending on the cryptocurrency being staked and the staking mechanism.
- Determine the amount of cryptocurrency staked. To calculate staking rewards, you must know the amount of cryptocurrency you have staked.
- Calculate the staking reward. Once you have determined the staking reward rate and the amount of cryptocurrency staked, you can calculate the staking reward by multiplying the staking reward rate by the amount of cryptocurrency staked.
For example, Jane has staked 100 QTUM with a staking reward rate of 6%. Jane has to multiply 100 by 0.06 to calculate her staking reward. So, Jane would get a reward of 6 QTUM.
Crypto Staking Taxes in the USA
The Internal Revenue Service (IRS) has not yet provided any guidelines regarding the taxation of cryptocurrency staking rewards. However, the IRS provided some clarification regarding the staking taxes in Notice 2014-21, published under cryptocurrency mining taxes.
The rules are straightforward when it comes to mining. The cryptocurrency’s fair market value when the miner acquired it in US dollars will be used to determine how much income tax should be paid on any mined cryptocurrency. And the miner must pay capital gains tax when they sell, use, or exchange the asset.
Due to this, many investors have assumed that staking and mining are taxed equally. But things are not as simple as they seem. Most tax professionals concur that staking rewards are probably subject to income tax on receipt and capital gains tax on the sale. At the same time, the IRS has refused to provide any additional clarification on the matter.
Key Points to Keep In Mind Regarding Crypto Staking Taxes in the USA
- Since staking rewards are subject to ordinary income tax rates, 10% to 37%, depending on your income level.
- If you receive staking rewards, you must report the income on your tax return using Form 1040 Schedule 1.
- Staking rewards may be subject to self-employment tax. If you are staking as part of a business or trade, you may be subject to self-employment tax on your staking rewards.
Crypto Staking Tax in Canada
Like the IRS, the Canadian Revenue Agency (CRA) has not issued explicit instructions concerning crypto staking. Staking is treated the same way that mining is. The CRA will tax the crypto you earn through staking differently depending on whether it is a hobby or a business activity. Staking may be more likely to be classified as income since, for many investors, the objective is not to acquire more assets but to make a profit. As a result, you will be taxed between 15% to 33% on your taxable income.
The CRA has focused primarily on intent when differentiating between income and capital assets. You would be required to pay income tax upon receipt based on the fair market value in Canadian dollars of your staking rewards on the day you receive them. However, if you sell cryptocurrency acquired through staking, you may be subject to capital gains or losses. This is calculated based on the difference between the sale proceeds and the cryptocurrency’s adjusted cost base.
Crypto Staking Tax in the UK
Staking is treated similarly to cryptocurrency mining income in HMRC’s (HM Revenue and Customs) tax guidance. Whether or not a staking activity ‘amounts to a taxable trade’ will affect how taxes are levied on it. This is influenced by how you’re staking, as an individual or a business.
You must separately report the income on your tax return under the category ‘Miscellaneous Income’ if you stake crypto as a hobby. If you are staking as a business, your income will be added to trading earnings and liable to income tax. You may be able to claim deductions for expenses related to staking. When you sell staking rewards in the UK, you typically have to pay capital gains tax.
Crypto Staking Tax in Australia
The Australian Taxation Office (ATO) taxes your staking activities differently depending on whether you stake as a pastime or for business. Staking as a hobby is not considered commercial profit. The rewarded cryptocurrencies are seen as a capital acquisition rather than income, and no expense deductions are allowed.
On the other hand, Staking as a business means you receive commercial profit. Therefore, you must declare on your income tax return any proceeds you earn from a staking pool or self-staking since they are taxable as ordinary income. In addition, if you sell cryptocurrency acquired through staking, you are subject to capital gains tax, calculated based on the difference between the sale proceeds and the cryptocurrency’s cost base.
The specific tax treatment of staking may vary depending on the tax regulations in different countries since some tax crypto staking activities while others do not. Therefore, it is important to keep accurate records of your staking activity. This article gave an overview of how crypto staking is taxed in the US, Canada, the UK, and Australia. We saw that crypto staking rewards are taxed similarly to mining in all those countries and treated as an income tax on receipt and capital gain/loss when you dispose of it. You just have to research your country’s tax law to understand whether staking is taxed. Then, consult with a tax professional familiar with cryptocurrency taxation to ensure you properly report your staking rewards and comply with all relevant tax laws.
1. Do you get taxed on staking?
Yes, cryptocurrency staking rewards are generally treated as taxable income and subject to income tax in many countries, including the USA, Canada, the UK, and Australia. However, the specific tax treatment of staking rewards can vary depending on the tax laws and regulations in different countries and may depend on factors such as whether the staking activity is done as a business or as a hobby.
2. Do you need to report staking crypto on taxes?
You must report staking rewards on your taxes in many countries, including the USA, Canada, the UK, and Australia. Therefore, it’s important to keep accurate records of your staking activities to report your staking income on your tax return properly.
3. Where do I report crypto staking on taxes?
The specific form to report cryptocurrency staking rewards on your taxes may vary depending on your country and its tax laws. In the United States, for example, you would generally report cryptocurrency staking rewards as income on your tax return using Form 1040 Schedule 1.