A Federal Appeals Court Tosses Case on Taxation of Staking Rewards
A man who asked a court to rule on the taxation of staking rewards received bad news when a federal appeals court dismissed his case. The man claimed that the token rewards he received from staking cryptocurrency should not be taxed on receipt but on disposition. The IRS initially denied his refund claim, but after he filed a lawsuit, they sent him a refund check.
The trial court dismissed the case without ruling on the merits, and the Sixth Circuit Court of Appeals has now affirmed that decision. The man filed a refund suit, and the IRS later paid him in full, rendering the case moot. It does not matter that the taxpayer did not cash the refund check.
IRS Issues Guidance on Taxation of Staking Rewards
While the court case mentioned above was ongoing, the IRS issued guidance on the taxation of staking rewards in July. According to the guidance, when someone stakes cryptocurrency native to a proof-of-stake blockchain and receives additional crypto units or tokens as validation rewards, the fair market value of those token awards is considered gross income in the year the taxpayer has control over the tokens.
Brokers Receive Guidance on Reporting Rules for Digital Assets
In other cryptocurrency tax news, brokers have received guidance on how to comply with reporting rules for digital assets. A 2021 law requires brokers to report sales price, tax basis, and other information on digital asset trades. The rules were initially set to take effect for digital assets acquired on or after January 1, 2023, but the IRS previously delayed the reporting obligation.
The proposed regulations issued by the IRS cover various topics, including:
- Reportable digital assets
- Brokers required to report under the rules (the definition of broker for this purpose is broad)
- Types of sales subject to reporting
- Information to be reported to the IRS and the taxpayer
- Gross proceeds in digital asset transactions
- And much more
Brokers will use the new IRS Form 1099-DA to report this information. They have a couple of years to prepare, as under the proposed regulations, brokers must report gross proceeds from digital asset sales starting in 2025. This means that individuals will not receive a 1099-DA from their broker until early 2026. Reporting of tax basis and character of gain will begin with 1099-DAs sent out in 2027.