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What is Staking and How is it Taxed?

Last updated: Wednesday, 20 October 2021

Staking is a consensus mechanism used by certain blockchains, like Ethereum. It's also a way for crypto traders to earn passive income, which in turn leads to taxes. But just how exactly is staking taxed?

Staking is like lending crypto. You do it to help secure certain blockchains, and in return you're rewarded in crypto - kind of like earning interest. Interest is income, and so staking is taxed as Income Tax in most countries. 

Let's start with the concept of Proof of Stake (PoS)

If you know how Bitcoin works, you’re probably familiar with Proof of Work (PoW). It’s the mechanism that allows transactions to be gathered into blocks. Then, these blocks are linked together to create the blockchain. More specifically, miners compete to solve a complex mathematical puzzle, and whoever solves it first gets the right to add the next block to the blockchain.

Enter Proof of Stake. The main idea is that participants can lock coins (their “stake”), and at particular intervals, the protocol randomly assigns the right to one of them to validate the next block. Typically, the probability of being chosen is proportional to the amount of coins – the more coins locked up, the higher the chances.

How do you stake?

If you're staking, you're depositing coins into a wallet or staking pool to earn coins as a reward for helping to validate actions on the blockchain. Like ‘staking your claim’ to help the blockchain.

In practice, you're sending coins from your wallet or an exchange to a specific wallet or staking pool. Ex Binance, RocketPool, StakeWise.

What are staking rewards?

It's like buying a raffle ticket with crypto. A winner is randomly picked to validate each new block. And paid a reward. The more raffle tickets, the more you might win.

What is a staking pool?

A staking pool is when a group of coin holders merge their resources. This consolidation can then allow them to up their chances of validating blocks and receive rewards in return. They essentially pool in their sources and share in the rewards. 

Typically, a staking pool is managed by a pool operator and the stakeholders that decide to join the pool have to lock their coins in a specific blockchain address (or wallet). While some pools require users to stake their coins with a third party, there are many other alternatives that allow stakeholders to contribute with their staking power while still holding their coins in a personal wallet.

Depositing coins into a staking pool - is it taxable?

NO. Very simply, when you stake you move coins from one wallet to another. Wallet to wallet transfers are not taxed. So coin deposits are not taxable.

Receiving coins as rewards - taxable?

YES. Receiving rewards is seen as a sort of interest payout - although this is a murky issue. For now, iIn most countries across the world, staking rewards are taxed under Income Tax on the way in. And when you dispose of your staking rewards , they are taxed as Capital Gains.

How is staking taxed in the US?

As of the date of this posting, the IRS has not issued any guidance on how stakings should be taxed. The closest guidance that could be used to infer how staking income should be taxed is the tax guidance on mining income issued on Notice 2014-21. The definition of IRS seeks to tax new tokens as income at the time they are created, and a taxable event also occurs when you sell the mined currency..

Exchanges provide a 1099-MISC to the users for incomes over $600, making it easier for the users to know the income generated through staking on an exchange.

Bone of contention

This 2014 notice fails to consider the inflationary effect of newly staked tokens and the ordeal of initiating a taxable event each time there are new tokens, which could be multiple times every day.

It’s been theorized that the IRS may issue guidance stating that taxpayers should consider staking rewards to be the creation of new property. In that case, there would be no taxable event until the sale of the property.

In essence, there is a push for staking to be taxed under Capital Gains Tax only. Staking results in a creation of “new property”. New property is taxed only at the time of sale, not when you discover it.

Need to know more about how cryptocurrency is taxed in the US? Read our updated guide here.

How is staking taxed in Canada?

The Canadian Revenue Agency has not released specific guidance for staking of cryptocurrency. Because staking is similar in nature to mining of cryptocurrencies, the safest approach is to treat received coins from staking in a similar fashion to mining.

Like with mining, the crypto you receive from staking will have different tax treatments depending on whether the mining is simply a hobby that you undertake sporadically or a business activity. This is  decided on a case by case basis. If mining is a hobby the crypto you mined will be considered as an asset and you will have to pay Capital Gains Tax (CGT) when you dispose of the crypto. However, the cost basis here would be zero because no money was spent in acquiring the crypto. No deductions are allowable in this scenario.

Need to know more about how cryptocurrency is taxed in Canada? Read our updated guide here.

How is staking taxed in the UK?

HMRC’s tax advice treats staking much the same as income from crypto mining. Any taxes applied to staking activity will be determined by whether or not the staking “amounts to a taxable trade.” This, in turn, is determined by several factors that include the nature of the organisation, and the commercial nature of the activity. That is, if you're staking as an individual, or as a business.

If staking isn’t determined to be amenable to a taxable trade, the pound sterling value of staking awards will be taxed as miscellaneous income. Capital Gains Tax will be applicable upon disposal.

How is staking taxed in Australia?

The ATO has indicated that the Australian dollar value of rewards received by staking will be taxed as ordinary income at the time of receipt. The same treatment will also apply to any other form of coin reward that is derived by a taxpayer as a result of contributing to a consensus mechanism, as well as rewards received from staking by proxy, or allowing a third party service to stake an individual’s coins on their behalf.

This approach aligns with long standing principles of tax law in respect of the derivation of ordinary income, i.e. the receipt of a reward for the provision of services. In the context of cryptocurrencies, validators (forgers) are essentially receiving a reward for their services to the relevant network in the eyes of the ATO. Capital Gains Tax will be applicable upon disposal

How do you report your Staking Income?

It's easy to track and tag your staking transactions with a crypto tax calculator like Koinly. With automatic and manual tagging of staking rewards.

Receiving staking rewards

Whenever you receive a reward, you should tag the Deposit transaction as a "Reward". This way Koinly will be able to summarize all reward transactions in your Income report so you can declare it in your tax returns.

Sending coins into a staking pool

Koinly will not import such transactions for most blockchains like Zilliqa, Elrond etc since these are not taxable.

However, if you are using Ethereum or Binance Smart Chain then these transactions will get imported as withdrawals. You should find these and tag them as "Sent to Pool" to prevent gains from being realized on them.

Receiving coins from a staking pool

Similar to the sent-to-pool transactions, Koinly will avoid importing these receive transactions for most blockchains since they are simply returning your own coins back to you and the transaction is unlikely to be taxable.

However, for Eth, BEP20 etc these transactions will get imported as Deposits. You should find and tag such transactions as "Received from Pool".

Note that this only applies when receiving back the capital that was originally sent to the pool.

It is very important to have proper Sent to Pool and Received from Pool pairs. If you tag a transaction as Received from Pool but have not tagged anything as Sent to Pool then you will see a "Missing purchase history" error because Koinly does not have any records of any coins being sent into the pool.

How is staking taxed?

  • Staking means to take a risk by lend crypto towards a goal
  • Your staking contribution should earn you a staking reward
  • Staking rewards are paid to you in cryptocurrency
  • This is similar to earning interest or being paid a dividend
  • Staking rewards are viewed as income and taxed as Income Tax in most countries.

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