Which Ethereum Staking Protocol Is Best For Your Taxes?
There are plenty of ETH staking protocols to pick from, but depending on how the protocol works, the tax implications may be very different. Learn more.
From centralized staking providers like Coinbase to running full validator nodes to liquid staking protocols like Lido - there are plenty of Ethereum staking protocols to pick from - but the tax implications for each can be very different.
What this means is that depending on the tax laws where you live, one ETH staking protocol may be more beneficial from a tax perspective than another, as your staking rewards may be subject to Income Tax or Capital Gains Tax depending on how your protocol works.
Let’s dive into it and look at some examples of different ETH staking protocols and how they’re taxed.
How do Ethereum staking protocol taxes work?
Tax laws vary depending on where you live, but most tax offices have issued guidance clarifying that staking rewards, like mining rewards, are subject to Income Tax. That means you’ll pay Income Tax based on the fair market value of your staking rewards in your fiat currency on the day you receive them.
And this would be true in the case of validators, as the transaction itself is pretty simple. However, when it comes to Ethereum staking protocols - the tax implications may vary depending on how the specific protocol works and whether you have income or a capital gain.
It’s easiest to understand this by looking at specific protocols and how they work, so let’s do just that and compare two of the largest decentralized Ethereum staking protocols, Lido and Rocket Pool.
stETH vs. rETH tax
Both Lido and Rocket Pool are decentralized Ethereum staking protocols - and they’re a great example of how different protocols may create different tax implications.
With Lido, you’ll receive stETH as a reward, which is always equal to ETH in value. These rewards are paid out frequently in a small amount - so your overall stETH balance will grow over time. These tiny rewards would likely be classed as a kind of income, like stock dividends, and therefore subject to Income Tax upon receipt.
Meanwhile, the Rocket Pool protocol works differently. Rewards aren’t paid out frequently in small amounts, rather the value of rETH increases. So you’ll always hold the same amount of rETH, but the value of rETH grows in comparison to ETH.
Since your holdings are not changing and you’re not receiving rewards, there’s no income to tax. Instead, you’d be taxed at the point you’re seen to dispose of the asset - for example, by selling or trading it - and any profit at that point would likely be a capital gain and therefore subject to Capital Gains Tax. This would be similar to growth stocks or stocks that use profits for buybacks.
There are, of course, other staking options, including centralized staking platforms, but again the tax all comes down to how the specific protocol works and whether you have income or a capital gain. We’ll compare two of the largest centralized staking platforms - Binance and Coinbase - to explain.
cbETH vs BETH tax
Like with our examples above, although Coinbase and Binance both offer Ethereum staking, the protocols work differently and may result in different tax implications.
With Binance, you’ll receive BETH. BETH is a wrapped token issued by Binance, issued on a 1:1 peg to Ethereum. In this instance, as you’ll receive new BETH tokens when you’re staking on Binance, this would likely be income and therefore subject to Income Tax.
Meanwhile, on Coinbase, you’ll receive cbETH in return for your staked ETH. With cbETH, the value of cbETH grows as rewards accrue, as opposed to receiving more cbETH tokens. So like in our rETH example, there’s no income to tax. As such, it’s likely that the taxable event is at the point you wrap and unwrap your ETH for cbETH. There's no official guidance on this from most tax offices around the world, but if it's seen as a crypto to crypto trade, any gain from wrapping and unwrapping your cbETH/ETH would be subject to Capital Gains Tax.
Which is the best ETH staking protocol for my taxes?
Great question - but it all depends on your specific financial circumstances and where you live.
For the majority of taxpayers who are full-time employees, the Capital Gains Tax rate will be much lower, and therefore Ethereum staking protocols that result in capital gains would be preferential to those that generate income.
Meanwhile, if you’re not in full-time employment and in a low Income Tax bracket (or if you live in a country where income is taxed at a lower rate than capital gains), an Ethereum staking protocol that generates income would be preferential from a tax perspective.
Read next: What's the best staking platform?
Use Koinly to help you calculate your Ethereum staking taxes
Whatever Ethereum staking protocol you’re using, Koinly can help you calculate your income or gains, keep track of your tax liability throughout the year, and generate your tax forms to help you easily file with your tax office. Best of all, it’s free to sign up to Koinly today.
