How the IRS Taxes Staking Rewards
The IRS has taken the position — and enforced it consistently — that staking rewards are taxable as ordinary income when they are received. This is stated in Revenue Ruling 2023-14, which clarified that when a taxpayer receives newly created cryptocurrency as a reward for validation activity, they must include the fair market value of those rewards in gross income at the time of receipt.
In practical terms, this means every staking reward you receive throughout the year is a taxable income event, even if you never sell the coins. If you receive 0.1 ETH as a staking reward when ETH is trading at $3,000, you owe income tax on $300 — regardless of what ETH does afterward.
- Taxed as ordinary income — at your marginal income tax rate, not capital gains rates
- Taxable when received — not when sold, not when withdrawn from a validator
- Fair market value at receipt — the USD value at the exact time the reward is credited
- Reported on Schedule 1 — as "Other Income," not on Schedule D
- Self-employment tax may apply — if staking is conducted as a business activity
Staking creates two separate tax events: (1) income tax when you receive the reward, and (2) capital gains tax when you eventually sell it. Many stakers forget about the first event and only track the sale — this leads to underreporting.
Proof-of-Stake vs Liquid Staking vs Restaking — Tax Differences
Not all staking is treated identically from a tax perspective. The mechanism matters, and the IRS guidance hasn't kept perfect pace with DeFi innovation. Here's how different staking structures are generally understood:
Direct Proof-of-Stake (e.g., Ethereum native staking)
Running a validator or delegating to one through the native protocol. Rewards are received directly from the protocol. These are clearly taxable as ordinary income under Revenue Ruling 2023-14. Each reward epoch generates a taxable income event.
Liquid Staking (e.g., Lido, Rocket Pool)
You deposit ETH and receive a liquid staking token (stETH, rETH) in return. The staking token accrues value or distributes rebasing rewards. The tax treatment here is more nuanced — but the dominant view among tax practitioners is that rebasing rewards (where your token balance increases) are still taxable as income when received. The exchange of ETH for stETH may or may not be a taxable event depending on how it's structured.
Restaking (e.g., EigenLayer)
Restaking involves using already-staked assets to secure additional protocols. Rewards from restaking are earned from multiple sources and are each likely taxable as income when received. The complexity here is significant — restaking rewards can come in multiple tokens from multiple protocols simultaneously, all requiring separate FMV calculations.
The Jarrett Case: Does It Still Matter?
In 2021, Joshua and Jessica Jarrett filed a lawsuit against the IRS after it rejected their refund claim. The Jarretts argued that newly created cryptocurrency tokens — including staking rewards — are property that you create yourself, similar to a manuscript or a crop, and therefore should not be taxable until sold, not when received.
The case received significant attention in the crypto community because it presented a credible legal argument against the IRS's income-at-receipt position. However, the IRS mooted the case by issuing a full refund, avoiding a precedent-setting ruling. The Jarretts re-filed to get an actual ruling, but as of 2026, no circuit court has definitively ruled in their favor on the core principle.
The Jarrett argument has not been validated by any court decision that binds the IRS. For reporting purposes in 2026, you should follow the IRS's stated position in Revenue Ruling 2023-14: staking rewards are taxable as ordinary income when received. Taking an aggressive position based on Jarrett carries audit risk.
How to Calculate the Cost Basis of Staking Rewards
The cost basis of staking rewards is straightforward: it equals the fair market value of the rewards at the time you received them — which is also the amount you reported as income. This is critical for calculating capital gains when you later sell.
Example: You receive 0.1 ETH as a staking reward when ETH is worth $3,000. You report $300 as income. Your cost basis in that 0.1 ETH is $300. Six months later, you sell that 0.1 ETH for $400 ($4,000 per ETH). Your capital gain is $100 ($400 sale price minus $300 basis). You pay income tax on the $300 staking reward AND capital gains tax on the $100 gain.
Why Tracking Individual Reward Events Matters
If you stake actively, you may receive hundreds or thousands of small reward events throughout the year. Each one creates a separate lot with its own cost basis and holding period. If you later sell some of your staked tokens, you need to know which lots you're selling to calculate gains correctly.
- Keeping FIFO, LIFO, or HIFO records across thousands of micro-rewards is impractical manually
- Most exchanges don't provide adequate tax documentation for staking — they may show deposits but not the income value at receipt
- DeFi staking creates on-chain rewards that don't appear in any exchange report — you need wallet-level tracking
When You Sell Staking Rewards — Capital Gains Layer
When you eventually sell tokens you received as staking rewards, you trigger a capital gains event on top of the income event you already recognized. The tax rate depends on how long you held the tokens after receiving them.
- Held less than 1 year: Short-term capital gains — taxed at your ordinary income rate (up to 37% federal)
- Held 1 year or more: Long-term capital gains — taxed at preferential rates (0%, 15%, or 20% depending on income)
- Net Investment Income Tax: High-income earners may owe an additional 3.8% NIIT on capital gains
This creates a planning opportunity: if you receive staking rewards and believe the price will be higher in the future, holding them for at least one year before selling qualifies the gain for long-term rates. The income tax on the reward is unavoidable, but converting the subsequent gain to long-term can significantly reduce total tax.
Tracking Staking Taxes With Count On Sheep
Manual tracking of staking rewards is nearly impossible for active stakers. If you're earning rewards daily or weekly across multiple protocols and wallets, you need software that can pull transaction data directly from the blockchain and assign accurate fair market values at the time of each reward.
Count On Sheep integrates with 300+ exchanges and DeFi protocols, identifies staking reward transactions automatically, pulls historical price data to calculate FMV at receipt, and builds your complete tax picture including both the income and capital gains components.
What Count On Sheep handles for staking
- Identifies staking rewards across centralized exchanges (Coinbase, Kraken, Binance, etc.)
- Connects to wallets and DeFi protocols for on-chain staking rewards (ETH validators, Lido, Rocket Pool, etc.)
- Assigns fair market value at time of receipt for each reward event
- Tracks cost basis of reward lots for future capital gains calculations
- Generates IRS-ready reports including Schedule 1 income and Form 8949
- Handles restaking and liquid staking token complexity