What Are Staking Derivatives?
Staking derivatives are tokens that represent your staked ETH in a protocol. They let you use your staked ETH elsewhere, earn yield, or trade. Examples include wstETH from Lido, cbETH from Coinbase, and rETH from Rocket Pool.
Unlike regular tokens, these derivatives often rebalance or rebase. That means their number of tokens can increase over time, reflecting the yield earned. They are designed to be compatible with DeFi but introduce new tax complexities.
How Do These Derivatives Work?
When you stake ETH, you receive a derivative token in return. For example, depositing ETH into Lido gives you wstETH.
wstETH is a 'wrapped stETH' that is designed to be non-rebasing. It maintains a fixed number of tokens, but the underlying stETH rebases—the number of ETH per token increases as you earn yield. Conversely, cbETH and rETH are rebasing tokens that automatically increase in quantity, reflecting accrued rewards.
Here's a simplified example:
- You stake 1 ETH in Lido.
- You receive 1 wstETH. Over time, your wstETH remains 1, but the underlying stETH it represents rebalances.
- If the protocol accrues 5% yield, your wstETH now effectively represents 1.05 ETH.
The key point: the tokens you hold may change in value or quantity, but the protocol handles the mechanics behind the scenes.
Tax Treatment of Staking Derivatives
The IRS has not issued specific guidance on staking derivatives like wstETH, cbETH, or rETH. As a result, tax professionals rely on principles from similar transactions—mainly, how to treat a swap or sale.
Most consensus is that when you acquire these tokens, it’s a taxable event—disposing of your ETH or staked position—and you take a cost basis in the derivative. When the token rebalances or accrues yield, it does not trigger a taxable event immediately.
However, when you eventually sell or convert your derivative back to ETH, the difference between your cost basis and the sale price determines gains or losses.
Important nuances include:
- Rebase tokens like rETH increase in quantity. This increase is generally considered income at the moment it occurs.
- Non-rebasing tokens like wstETH are designed to keep a fixed quantity, so rebalancing does not generate taxable income until a sale.
Expert opinions vary. Many agree: acquiring these tokens is a taxable event, but ongoing rebalancing or yield accrual may or may not be taxable until realization.
To illustrate:
- You stake 1 ETH at $2,000.
- You receive 1 wstETH with a $2,000 basis.
- After 6 months, your wstETH now represents 1.05 ETH, but no taxable event occurs until you sell.
- When you sell for $2,100, you realize a $100 gain.
In contrast, rebasing tokens like rETH increase in quantity, which may be treated as ordinary income at each rebasing event, depending on circumstances.
Common Mistakes with Staking Derivatives
Mistake 1: Assuming rebasing tokens are non-taxable because they increase in quantity. In reality, each rebasing event can trigger income recognition.
Mistake 2: Not tracking your cost basis properly when acquiring derivatives—especially if you switch between different tokens or protocols.
Mistake 3: Forgetting that exchanging derivatives back to ETH is a taxable event—treat it as selling your position.
These errors can lead to underreporting income or incorrect gains, risking IRS penalties.
How Moonscape Handles Staking Derivatives
Moonscape detects staking derivative transactions automatically. When you acquire wstETH, cbETH, or rETH, we record the acquisition as a disposal of ETH or staked ETH, establishing your cost basis.
Our system tracks rebases and yield accruals, flagging taxable income when rebasing occurs—particularly for rebasing tokens like rETH. We also recognize conversions back to ETH, matching sales to your original basis.
For non-rebasing tokens like wstETH, Moonscape maintains the fixed quantity and only triggers gains or losses upon sale or exchange.
This comprehensive tracking helps you accurately report your staking derivatives, avoiding surprises at tax time.