What is Crypto Staking?

Crypto staking involves the process in which the investors lock up their cryptocurrency holdings. They do this in order to receive rewards and also earn the interest given to all staked cryptocurrencies (rates vary depending on platform and currency type). In this scenario, crypto staking basically acts as the virtual equivalent of saving your monetary asset in the bank in order to maximize profits. Only in this case, instead of a bank vault, the cryptocurrency finds itself stored on the blockchain. Therefore, in simple terms crypto staking involves the validation of transactions on a blockchain. Often, the technology used in the validation process is known as ‘proof-of-stake’. 

Crypto staking works by allowing investors to hold their cryptocurrency in a wallet of their choosing. New blocks emerge on the blockchain where the data gets written into. After the completion of this process, the cryptocurrency holdings of the investors will be used as validators.

A number of popular cryptocurrencies allow for crypto staking – ranging from the established Ethereum to the newer Solana and AVAX.

Are crypto staking profits taxable?

Unsurprisingly, there remains much confusion around the tax aspect. This is a brand new stream of income for the investor as well as the regulators to consider. So are crypto staking profits taxable? As of 2022 February with the ongoing lawsuit between a couple and the IRS, many believe the profits generated do not fall under taxable income. 

In the new update from the lawsuit, the IRS offered to pay the settlement. Basically an American couple took the IRS to court for a refund after being made to pay taxes on the crypto staking profits they had generated in the year 2019. 

However, the IRS still views crypto staking profits as mining income. This means the profits received from crypto staking require a receipt and thus, need to be included with ordinary income. 

As of now, however, the debate remains relatively new. And thus only time will tell whether the IRS deems crypto staking profits as taxable income. That’s bad news for many of you, but given the pressure on regulators, we are likely to have clear cut answers by the end of the year.