The Internal Revenue Service published Revenue Procedure 2025-31 (the “Rev. Proc.”), granting safe harbor relief (the “Safe Harbor”) to exchange traded products (“ETPs”) seeking to engage in staking activities on November 10, 2025. Prior to this relief, there was significant uncertainty as to the activities an ETP could undertake while maintaining its classification as an investment trust and a grantor trust. The Rev. Proc. provides the Safe Harbor under which an ETP will not be disqualified from being an investment trust and a grantor trust for U.S. federal income tax purposes if certain criteria are met. The general structuring of digital asset ETPs, the Rev. Proc. and the Safe Harbor are discussed below.
Background
For tax purposes, ETPs are classified as investments trusts if, among other criteria, there is no managerial authority to vary the investment of the trust. A power to vary the investment of the trust has been found to exist where the trust can take advantage of variations in market conditions to improve the position of trust unit holders. If an investment trust is classified as a grantor trust, which is a disregarded entity for U.S. federal income tax purposes, each investor is treated as owning its pro rata share of trust assets for U.S. federal income tax purposes. The tax reporting is on a Form 1099, not a Schedule K-1.
If a “power to vary” exists, the trust will not be an investment trust but rather treated as a business entity, which would either be partnership or corporation classification for U.S. federal income tax purposes. ETP sponsors generally disfavor classification as a business entity, taxable as either a partnership or corporation, because of tax complexities, tax inefficiencies and investor preferences for 1099, not K-1, reporting.
ETPs function as a regulated wrapper providing access to digital asset investments. Generally, the Form 1099 reporting offers tax simplicity relative to receiving a K-1 at the end of the year. Early ETPs made a concerted effort to be structured and managed in a way that permits Form 1099 reporting, broadly resulting in single asset, non-actively managed ETPs that do not stake.
The Rev. Proc. provides a safe harbor that permits staking (but not active management).
Description of the Safe Harbor and other Rules under the Rev. Proc.
To satisfy the new Safe Harbor, an ETP (or the ETP’s sponsor or trustee acting on its behalf) must:
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Have units traded on a national securities exchange and actively comply with SEC regulations and rules. This includes making all material disclosures, including with respect to staking activities, as well as written liquidity risk policies and procedures in compliance with the rules of the listing exchange.
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Own only cash and/or units of a single type of digital asset. The subject digital asset must carry out transactions on a permissionless blockchain that uses proof-of-stake validation.
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Arrange for the digital assets to be held by a custodian on its behalf, at wallet addresses controlled by the custodian. Only the custodian can access the private keys, which essentially establishes the custodian as the only seller, transferer or exerciser of ownership rights over the trust’s assets, including while those digital assets are staked. The Rev. Proc. confirms that the ETP remains the owner of the assets for U.S. federal income tax purposes despite this custodial relationship.
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Conduct staking activities in a manner that protects and conserves ETP property by mitigating the risk that another party or group could control a majority of the total staked digital assets and engage in transactions that could reduce the value of the trust’s digital assets.
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Limit activities to:
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Accepting digital asset or cash deposits in exchange for trust units
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Holding digital assets and cash
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Paying trust expenses and selling digital assets for cash to pay trust expenses, or making cash redemptions of trust interests;
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Purchasing additional digital assets with cash contributed to the trust;
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Making redeeming distributions in cash or in kind;
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Liquidating the ETP assets for cash;
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Directing digital asset staking in a manner consistent with the applicable requirements of the exchange on which the ETP is listed, including providing for a liquidity reserve and entering into a contingent liquidity arrangement, as applicable;
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Be restricted by its trust deed from taking advantage from variations in the market to improve the investments of ETP unit holders.
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Direct its custodian to facilitate staking with one or more staking providers, subject to the following requirements:
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The staking provider cannot be related to the ETP or the ETP sponsor.
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The trustee, sponsor and custodian of the ETP must perform appropriate due diligence when selecting each staking provider and negotiate, on behalf of the ETP, the contract with the staking provider.
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The staking provider must regularly enter into staking arrangements with unrelated third parties (unrelated as to the staking provider and the ETP, custodian and sponsor).
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The staking provider bears its own expenses.
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The allocation of rewards between the staking provider and the custodian must be an arms’ length allocation.
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The ETP, custodian and sponsor cannot have a legal right or arrangement to participate in or control the activities of the staking provider, except the limited right to direct the staking and un-staking of digital assets.
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Make all of its digital assets available to the staking provider for staking at all times, subject to the following exceptions:
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An ETP may stake less than all of its digital assets to create and maintain a liquidity reserve. This is requirement of the ETP’s liquidity policy.
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Digital assets may be held in reserve and not available for staking if such assets (i) will be sold for cash to pay trust expenses, (ii) were contributed or will be distributed in connection with the creation or redemption of ETP units, (iii) are involved in a purchase or sale in connection with cash contributions or cash redemptions by investors, or (iv) are received as staking rewards.
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Consider entering into a contingent liquidity arrangement for purposes of mitigating an adverse liquidity event that otherwise would prevent the ETP from distributing digital assets or cash to holders in redemption of their ETP units. The Rev. Proc. describes a contingent liquidity arrangement as a lending facility or other arrangement permitting the ETP to borrow cash or an arrangement to sell or purchase digital assets for cash or digital assets on a current or deferred basis.
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Be indemnified from slashing due to the activities of a staking provider.
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Ensure that the only new assets received by the trust as a result of staking its digital assets are additional units of the same type of digital assets as are held by the trust. The ETP’s staking rewards, net of expenses, are distributed proportionately to the ETP unitholders’ relative interests in the ETP no less frequently than quarterly.
The IRS permits existing digital assets ETPs that are grantor trusts to amend their trust deeds to conform to this Safe Harbor between November 10th, 2025, and August 9th, 2026.
Legal Tokens
The Rev. Proc. represents a significant shift in tax policy regarding the structuring and federal income tax treatment of publicly-traded investment trusts. This is truly a watershed moment in the Department of Treasury’s digital asset efforts, seeking to modernize tax policy and balance it with the regulatory efforts of the SEC and CFTC, as well as being mindful of statutory trust law.
Based on anecdotal evidence, ETP sponsors generally are comfortable with the requirements set forth in the Rev. Proc., but are several big questions remain open. The Safe Harbor does not apply to non-digital asset ETPs, substitution of assets or other issues that traditional investment trusts typically encounter. There is not any stated relief for good faith compliance. Thus technical, foot faults could result in re-classification of ETPs as business entities, which may cause the ETP to incur tax penalties.
Existing ETPs may desire to amend their trust agreements to permit staking activities. Certain ETPs that are structured as publicly-traded partnerships may consider converting to a trust structure. In either case, careful consideration should be given to the securities laws, tax, accounting and other regulatory considerations regarding any amendments or conversions.
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.
