The IRS Revisits Staking ETPs: Key Updates in Rev. Proc. 2026-20
New staking guidance is always helpful in the weeks leading up to Halloween. Should we use Hawthorn or Oak; or are silver stakes better for slaying vampires? Is Aspen really naturally toxic? Pardon me, this SKrypto post is about another kind of staking: staking in exchange-traded products (“ETPs”).
Last year, the IRS issued Revenue Procedure 2025-31, establishing a safe harbor allowing certain ETPs structured as investment trusts and grantor trusts to engage in proof-of-stake staking activities without jeopardizing their federal income tax classification. We discussed that guidance in our prior alert, Lowering the Stakes on Exchange-Traded Products: IRS Guidance Safe Harbors Staking Activity in ETPs.
On October 6, 2026, the IRS released Revenue Procedure 2026-20, which clarifies, modifies, and ultimately supersedes Revenue Procedure 2025-31. While the new guidance does not fundamentally alter the IRS’s conclusion that certain staking activities are consistent with investment trust and grantor trust status, it substantially expands and refines the operational parameters of the safe harbor, responding to industry requests for additional guidance on custody arrangements, staking rewards, liquidity management, and related issues.
Legal Tokens
The safe harbor remains limited to proof-of-stake networks
Revenue Procedure 2026-20 does not expand the safe harbor to new categories of blockchain protocols. Consistent with the prior guidance, the safe harbor remains available only for trusts holding a single digital asset operating on a permissionless network that uses a proof-of-stake consensus mechanism.
That said, the revised guidance adopts a more flexible description of proof-of-stake validation activities and expressly recognizes delegated staking arrangements in which digital asset owners may delegate staking power without transferring ownership of the underlying assets.
Multiple custodians are now expressly permitted
One of the most significant practical changes is the IRS’s express recognition that a trust may utilize one or more custodians and one or more staking providers.
Revenue Procedure 2025-31 generally contemplated a single custodian structure. Revenue Procedure 2026-20 modifies the safe harbor to accommodate modern custody arrangements involving multiple custodians and staking providers, while continuing to require that custodians maintain exclusive control over the private keys associated with the trust’s assets and ownership remains with the trust.
Greater flexibility for staking reward distributions
The 2026 guidance significantly expands the permitted treatment of staking rewards.
Under the original safe harbor, staking rewards generally were required to be distributed either entirely in-kind or entirely in cash on at least a quarterly basis. The new guidance expressly permits a combination of cash and in-kind distributions and establishes a more detailed distribution framework tied to the trust’s receipt of staking rewards.
The IRS also clarifies that the safe harbor applies equally to newly minted token rewards and transaction-fee rewards, regardless of whether those rewards remain staked or are unstaked before distribution.
Broader authority to make non-redemption distributions
Revenue Procedure 2025-31 largely focused on redemptions and redemption-related liquidity needs. Revenue Procedure 2026-20 expressly permits ordinary distributions to investors that are not connected to a redemption event.
This change aligns the safe harbor more closely with the operational realities of ETPs that distribute staking rewards to shareholders while remaining fully invested.
Slashing protections are refined
The original guidance required trust assets to be indemnified against slashing attributable to staking-provider activities. The 2026 guidance adopts a more practical standard, requiring indemnification only for slashing events reasonably within the staking provider’s control or ability to prevent.
This refinement should make the safe harbor easier to implement in commercial staking arrangements while preserving the IRS’s focus on protecting trust assets.
Digital-asset borrowing remains outside the safe harbor
Although the IRS expanded several aspects of the safe harbor, Revenue Procedure 2026-20 also includes an important limitation. The guidance expressly provides that a permitted contingent liquidity arrangement does not include an arrangement in which the trust obtains digital assets in a transaction treated as a borrowing of digital assets for federal income tax purposes.
As a result, the revised safe harbor continues to focus on relatively straightforward staking arrangements and does not appear to accommodate more complex structures involving token borrowing.
Existing trusts receive a new transition period
Revenue Procedure 2026-20 provides a six-month transition period beginning October 6, 2026, during which existing trusts may amend their governing documents, revise operational procedures, or take both actions to satisfy the revised safe harbor requirements.
After that transition period expires, taxpayers may no longer rely on Revenue Procedure 2025-31.
Conclusion
Revenue Procedure 2026-20 reflects the IRS’s attempt to respond to practical questions raised by sponsors, custodians, and market participants following issuance of the original safe harbor. Although the revised guidance does not materially expand the types of staking protocols eligible for safe-harbor treatment, it provides significantly greater clarity regarding custody arrangements, liquidity management, reward distributions, and operational compliance. Sponsors of digital asset ETPs that rely on the 2025 safe harbor should review the new guidance carefully and evaluate whether amendments to trust documents, custody arrangements, staking agreements, or operational procedures are necessary before the transition period expires.
If we were knocking on the IRS’s door, Rev. Proc. 2026-20 is less trick and more treat. Should you be staking this Halloween, remember that hardwoods are better for slaying vampires due to less risk of splintering and that staking ETPs should rely on the new IRS guidance going forward.
Seward & Kissel LLP actively monitors tax changes and their impact on the financial services industry. For additional information, please contact a member of Seward & Kissel’s Digital Assets Group or Tax Group.
