SUMMARY
On July 31, 2023, the IRS issued Revenue Ruling 2023-14 (the “Ruling”), addressing the tax treatment of cryptocurrency received as rewards for validating blockchain transactions on a proof-of-stake consensus mechanism (such activity, “staking”, and such rewards, “validation rewards”). The Ruling holds that the validation rewards are includible as gross income when the taxpayer can freely dispose of them without restrictions.
DISCUSSION1
Background
Cryptocurrencies are virtual currencies that are digitally recorded on a distributed ledger, usually a blockchain. To maintain legitimacy of the blockchain and its associated cryptocurrency, blockchain transactions must be verified by a consensus mechanism before the transaction is accepted and updated on the blockchain. Although many major cryptocurrencies still use “proof-of-work” consensus mechanisms, which require participants to “mine”, or solve complex, energy-intensive, cryptographic puzzles to verify the transaction, a growing number of cryptocurrencies use “proof-of-stake” consensus mechanisms.
