This week, the U.S. Tax Court ruled against a taxpayer that did not report staking income on his federal income tax return. This case, Paschall v. Commissioner, TC Memo 2026-46, closely tracks the advice I have provided to clients since staking emerged as a proof of validation. We have been thinking about taxation of staking rewards long before the IRS issued Revenue Ruling 2023-14, which discussed staking rewards. Under that ruling, taxpayers must treat staking rewards as income when there is dominion and control over those rewards. I summarize that guidance here: IRS Raises the Stakes on Staking.
Take for example a fund that stakes tokens in a protocol that allows withdrawal of rewards at the end of a 30-day cycle. If rewards are not withdrawn at the end of a cycle, everything rolls forward. This allows for compounding rewards, similar to a TradFi dividend reinvestment plan.
In dividend reinvestment plans, called DRIPs, the ongoing dividends are still taxable in the year paid despite the dividends being reinvested into stock of the corporation paying the dividend. Therefore I took the view that the staking rewards in our example are also taxable when the taxpayer has the ability to withdraw the rewards, even if the rewards are passively rolled forward in successive staking cycles.
My thought process was that (1) IRS guidance provided that digital asset airdrops, hardforks and other rewards were recognizable as income when the taxpayer has dominion and control over those assets and (2) the client had the ability to withdraw and convert to cash at the end of each 30-day cycle.
LEGAL TOKENS
In the Paschall case, the taxpayer staked Cardano tokens via an eToro staking pool. Under the protocol, there were no material restrictions on staking rewards or his ability to opt out of the staking pool, but eToro restricted his ability to transfer to other wallets. The Tax Court was especially persuaded by the fact that “chose not to sell the staking rewards… [even though] he could do so.”
The Tax Court keyed in on the same crucial fact that I have when I previously gave advice to clients in similar situations: the ability to withdraw staking rewards at your own determination and to convert to cash or other digital assets. This is the essence of having dominion and control over staking rewards.
Key takeaway: staking rewards are taxable once the taxpayer has the practical ability to access and dispose of them.
