17 June 2026 Tax Court confirms staking rewards are taxable upon receipt
The US Tax Court held in Paschall v. Commissioner, T.C. Memo. 2026-46, that cryptocurrency staking rewards constitute gross income in the tax year they are credited to a taxpayer's account, concluding that the taxpayer realized an accession to wealth over which he had dominion and control, even though the tokens were not sold or transferred during the year. The decision provides the court's first analysis of the federal income tax treatment of "proof-of-stake" rewards, using existing statutory and judicial income-recognition principles applicable to all assets. The Tax Court described the staking activity in the following manner. The proof-of-stake protocol, unlike the proof-of-work protocol used by Bitcoin and others, incentivizes token holders to stake their tokens as collateral (stakers). Stakers are selected by algorithm to confirm the validity of new blocks to the blockchain. Stakers that dishonestly or incorrectly validate transactions can forfeit their staked tokens, while token holders that successfully validate, receive additional tokens as staking rewards. Since holders must often stake large numbers of tokens to be selected by the algorithm to operate as validators, holders often contribute their tokens to large pools; the pool organizer then stakes the tokens and distributes the rewards to pool contributors proportionately. In Paschall, the taxpayer held Cardano cryptocurrency through eToro, a digital asset platform that automatically staked customers' tokens unless the customer affirmatively opted out. During tax year 2021, additional Cardano tokens were credited monthly to the taxpayer's account as staking rewards. At any time, the taxpayer could have sold his Cardano tokens for cash. When eToro delisted Cardano in 2022, the taxpayer moved his Cardano holdings to a different platform. EToro issued a Form 1099-MISC reporting the fair market value of the staking rewards as other income, but the taxpayer challenged that inclusion, arguing the rewards were not taxable until realized through a sale or disposition. IRC Section 61 defines gross income broadly to include "all income from whatever source derived." Under Supreme Court precedent, gross income includes all realized accessions to wealth over which the taxpayer has complete dominion and control. Income is therefore constructively received when it is credited to the taxpayer's account or otherwise made available so that the taxpayer may draw upon it at any time, unless the taxpayer's control is subject to a substantial limitation or restriction. In Notice 2014-21, the IRS classified virtual currency, which includes digital assets such as cryptocurrency, as property, not currency, for federal income tax purposes. This means that sales, exchanges or other dispositions of cryptocurrency and other digital assets (including stablecoins) are generally reported on Form 8949, Sales and Other Dispositions of Capital Assets, and Schedule D. In Revenue Ruling 2023-14, the IRS clarified that cryptocurrency staking rewards are taxable income; as such, taxpayers that gain dominion and control over staking rewards must include the rewards/FMV in their gross income and report that income on Form 8949 and Schedule D. The court considered the application of income-realization principles to the receipt of staking rewards. The issue thus became whether the taxpayer had obtained dominion and control over the staking rewards in the year at issue. The staking reward tokens were credited to the taxpayer's custodial account and were immediately convertible to cash in the same manner as the other Cardano tokens held. Although the platform temporarily restricted transfers of Carnado tokens to external wallets, the taxpayer retained the ability to sell the tokens at any time. Because the taxpayer had unfettered command over the economic value of the rewards, the court concluded that the rewards were includible in gross income in the year received. The taxpayer argued that staking rewards should be treated like nontaxable stock dividends or unrealized appreciation, relying on Eisner v. Macomber, 252 U.S. 189 (1920). The court rejected this analogy, explaining that stock dividends do not increase a shareholder's proportionate interest or intrinsic value, whereas Cardano staking rewards increased both the taxpayer's proportionate holdings and the overall value of his interest. The court also noted that proportionate staking rewards were not automatically distributed to all Cardano holders. Cardano staking was automatic on eToro, but other Cardano holders could opt out of staking and other platforms that hosted Cardano could take a different approach to staking. As a result, the rewards represented a realized accession to wealth that was taxable under IRC Section 61. The court also rejected the taxpayer's reliance on Jarrett v. United States, No. 3:24-cv-01209 (M.D. Tenn. filed Oct. 10, 2024), noting that the government's concession in that case was limited to granting a refund and did not address the merits of the taxpayers' argument that staking rewards are self-created property. Distinguishing staking from activities that produce self-created assets, the court noted that the taxpayer did not create the tokens or control their issuance. Instead, the blockchain protocol awarded tokens in exchange for validation services, and the taxpayer lacked discretion over whether and when the tokens were produced. The rewards therefore fall within the scope of gross income under IRC Section 61. While acknowledging administrative guidance on the tax treatment of staking rewards, the court expressly stated that it did not rely on that guidance in reaching its conclusion, declining to address the taxpayer's assertion that the guidance was invalid under Loper Bright Enterprises v. Raimondo, 144 S. Ct. 2244 (2024). Instead, the court grounded its holding in the text of IRC Section 61 and related case law. As a result, the court did not address arguments concerning the retroactive application or legal weight of later administrative pronouncements. The precedential value of this case may be limited as Paschall is a memorandum opinion decided on a fully stipulated record, and the taxpayer appeared pro se. The court also noted that the parties did not present expert testimony, which limited the factual development regarding the mechanics of staking. This decision squarely comports with prior IRS guidance on the topic of staking rewards, specifically on the issue of whether income recognition results when staking rewards are deemed to be received on the grounds that an accession to wealth arises from having dominion and control over those rewards. Other fact patterns, however, may involve circumstances where taxpayers did not have dominion and control over the staked tokens, and thus may lead to a different result. Notably, the Tax Court rejected the taxpayer's contention that the Jarrett case provides support for analogizing staking rewards to self-created property. In a footnote, the court noted that the government never addressed the merits of the Jarretts' arguments, nor was the government's concession binding precedent for the Tax Court. The Jarretts filed a new refund suit on October 10, 2024, involving a subsequent tax year, which is currently set for trial on September 29, 2026.1 Unlike Paschall, which involved custodial platform staking through eToro, the renewed Jarrett litigation alleges that the taxpayer personally participated in Tezos block validation (known as "baking") using his own tokens and computing infrastructure. Accordingly, the renewed Jarrett suit may present a different factual context for considering the treatment of certain staking rewards. There are notable gaps in the Tax Court's understanding of how staking protocols work in practice, which the court itself acknowledges in footnotes, observing that the lack of expert testimony was detrimental to its full understanding of Cardano staking. This acknowledgement may provide a basis for clients with different facts and circumstances to argue for different tax treatment. This Tax Court holding may also be mooted by future legislation. Cryptocurrency regulation bills are expected later this year, and early drafts have included provisions under which staking rewards would be subject to non-recognition until disposal.2
Document ID: 2026-1297 | ||||||||
