Senate Republican presses IRS on tax treatment of crypto staking

Senator Todd Young is urging the IRS to review and reconsider earlier guidelines on the tax treatment of rewards cryptocurrency owners collect in exchange for “staking,” or locking assets on a blockchain network to aid its operation and validate transactions.

The Indiana Republican, who sits on the powerful Senate Finance Committee with jurisdiction over the IRS, sent a letter Tuesday to Treasury Secretary Scott Bessent urging review of 2023 guidelines that tax cryptocurrency owners on the rewards they receive for staking digital assets when they receive them, rather than when they sell them. Bessent also serves as acting IRS commissioner.

The Biden-era guidelines apply to the practice of locking a cryptocurrency on a blockchain network to aid its operation and security in exchange for rewards, often in the form of additional digital tokens.

Digital asset advocates have urged Congress or the IRS to reverse the ruling, saying owners instead should be taxed on staking rewards when they’re sold or exchanged. Taxing owners on the rewards before they sell them taxes them on gains they haven’t yet realized, they say.

Young asked the IRS to provide details around the process for issuing the 2023 ruling, as well as any plans to review or clarify it. The Trump administration in a July report on digital assets called for the Treasury and the IRS to review the 2023 guidelines.

“It has generated uncertainty for taxpayers, will likely complicate the revenue scoring of legislative proposals, and risks unintended confusion with forthcoming statutory frameworks,” Young wrote of the 2023 guidelines in the letter shared with Bloomberg News. The Senate is locked in bipartisan negotiations over a House-passed measure that would establish market regulations for digital assets.

Democrats skeptical of cryptocurrency, including Senators Elizabeth Warren of Massachusetts and Tina Smith of Minnesota, defended the guidelines at a Finance Committee hearing last month, saying staking rewards are paid out as compensation, which is taxed when it’s received.

“Our tax system generally imposes a tax when someone provides a valuable service in return for compensation” regardless of how they’re paid, Smith said. “They pay taxes on that compensation.”

Delaying the taxation of a staking reward effectively creates a tax subsidy for that work, which would disproportionately benefit the deep-pocketed players on the blockchain, Smith said.