What Is Proof-of-Stake (PoS) and How Do Rewards Work?
PoS is a consensus mechanism where you lock up tokens ('stake') to support network security. In return, you earn rewards—newly minted tokens or transaction fees. These rewards are credited periodically, often daily or epoch-based. When you stake, your tokens are temporarily immobilized, and rewards accrue over time.
When Are Rewards Credited and How Do They Accumulate?
Rewards are typically credited automatically to your wallet at regular intervals. For example, if you stake ETH on a PoS chain like Ethereum 2.0, you might receive a certain amount of ETH every epoch—say, weekly. These rewards increase your total holdings, but whether they are taxable when credited depends on IRS guidance and tax community consensus.
The Income vs Capital Gains Debate
The IRS hasn't issued specific guidance on staking rewards. Most tax professionals agree: when rewards are credited to your wallet, they are considered taxable income at fair market value. This aligns with general guidance on rewards, airdrops, and mining income. However, some argue these rewards are more akin to capital gains realized when you sell or dispose of the tokens.
In practice, most CPA guidance treats staking rewards as ordinary income when credited, with a basis equal to that income. When you sell the tokens later, any gain or loss is capital, based on the difference between sale price and basis.
Example: Staking ETH on Ethereum 2.0
Suppose you stake 10 ETH worth $2,000 each, total $20,000. Every month, you receive 0.1 ETH as a reward, valued at $200 at the time of credit. When you receive this reward, most tax experts agree: you owe income tax on $200. Your basis in that reward is now $200. Later, if you sell the reward for $250, you have a capital gain of $50.