Liquid Staking Tokens and Taxes: What Rev. Rul. 2023-14 Answers and What It Does Not

Plain staking finally has an IRS answer. Liquid staking mostly does not. If you deposit tokens with a protocol and get back a different token that represents your staked position, you are operating in a space where the IRS has said, in effect, we are still thinking about it.

That does not mean anything goes. It means you need to know exactly which questions are settled, which are open, and how to take a position you can defend.

What is settled: staking rewards are income

Rev. Rul. 2023-14 addresses a cash-method taxpayer who stakes cryptocurrency native to a proof-of-stake blockchain and receives additional units as validation rewards. The holding: the fair market value of the rewards is included in gross income in the taxable year the taxpayer gains dominion and control over them, measured at the date and time the taxpayer gains that control. The ruling says the same is true if the taxpayer stakes through a cryptocurrency exchange.

In the ruling's facts, the rewards were locked for a brief period by protocol rules. Income arose the day the taxpayer gained the ability to sell, exchange or otherwise dispose of them, not the day they were credited. The value you include becomes your basis in those reward units. For the basics, see the existing guide on staking rewards and IRS taxation.

The ruling is careful about its limits. A footnote says it does not address gas or transaction fees other than the validation rewards, and another says it does not address issues under rules not specifically cited, such as section 83.

What liquid staking adds

Liquid staking protocols take your tokens, stake them, and give you a receipt token you can trade, lend or use elsewhere. The receipt token generally tracks your share of the staked pool plus accumulated rewards. Two design patterns matter for tax analysis:

• Rebasing tokens. Your token balance increases periodically as rewards accrue. You hold more units over time, each worth roughly one unit of the underlying asset.
• Value-accruing tokens. Your balance stays the same, but each token becomes redeemable for more of the underlying asset over time.

Notice 2024-57 describes this structure precisely: the transfer of a digital asset into a smart contract in return for a different digital asset representing an interest in a pool used for proof-of-stake validation, and the later redemption for a proportional share. It lists those transactions among the ones brokers are not required to report while the Treasury studies them, and it says expressly that the description does not reflect a substantive tax analysis and creates no inference.

Open question one: is the deposit a taxable exchange?

Treas. Reg. 1.1001-7 says that when a digital asset is exchanged for a different digital asset differing materially in kind or in extent, the amount realized is the value of what you receive. If depositing ETH and receiving a liquid staking token is an exchange of materially different assets, the deposit is a disposition and you recognize gain or loss on the ETH.

The other view is that you have not given anything up in substance: the receipt token is a claim on your own staked asset, and the deposit is more like moving property into an arrangement than selling it. The IRS has not resolved which view applies. Notice 2024-57 chose not to.

The answer matters most when the deposited tokens have a large built-in gain or loss. If your ETH basis is close to its current value, the difference between the two views is small. If you bought years ago at a fraction of today's price, it is not.

Open question two: when are rewards income?

With a rebasing token, new units arrive in your wallet. Applying the dominion and control reasoning of Rev. Rul. 2023-14 by analogy, there is a strong argument that each increase is income when you can dispose of it. Many careful practitioners take that position.

With a value-accruing token, no new units arrive. One view is that the increase in redemption value is simply appreciation in property you hold, taxed when you sell or redeem. Another view is that rewards are being earned and should be recognized as they accrue. Rev. Rul. 2023-14 does not answer that question, because its facts involve new units delivered to the taxpayer.

Open question three: what happens on redemption?

When you redeem a liquid staking token for the underlying asset, you again face the exchange question. If the original deposit was treated as a taxable exchange, the redemption is a disposition of the receipt token. If it was not, the redemption may simply return your original asset with whatever rewards have accumulated, and you need a coherent way to account for those rewards.

The key is consistency. A position that treats the deposit as nontaxable and the redemption as taxable, or the reverse, without a principled reason, is hard to defend.

Slashing and other losses

Rev. Rul. 2023-14 describes slashing, the protocol penalty under which some or all staked units can be forfeited if validation fails, but it does not address how a slashing loss is treated. A forfeiture of staked units is a loss of property, and the questions are the same ones that arise for any crypto loss that is not a sale: is it a deductible loss at all, and is it limited as a miscellaneous itemized deduction? Those limits are discussed in worthless crypto tokens. Record any slashing event with the date, units lost and their basis.

Staking through an exchange

If you stake through a centralized exchange rather than a protocol, Rev. Rul. 2023-14 says the same income rule applies: rewards are income when you gain dominion and control. Exchanges often present staking as a simple balance that grows. That is a rebasing pattern in practice, and each credit you can withdraw or sell is most defensibly treated as income when credited.

Taking a defensible position

• Identify the design. Rebasing or value-accruing, and how redemption works.
• Pick a position on the deposit and redemption and apply it consistently across years and protocols with the same design.
• For rebasing tokens, track each reward increment with its date, quantity and value. That is your income and your basis.
• Keep the protocol documentation that describes how the token works as of the time you used it.
• Consider disclosure. The regulations under section 6662 provide for adequate disclosure of return positions, and a disclosed, reasonable position on unsettled law stands on different footing than an undisclosed one.
• Do not double count. Rewards included in income create basis.

A worked example

You deposit 10 ETH with a basis of $1,500 each into a rebasing liquid staking protocol in 2026 when ETH is worth $3,000. Over the year your balance grows by 0.3 tokens.

• Under the exchange view, the deposit is a disposition of 10 ETH for receipt tokens worth about $30,000, producing about $15,000 of gain, and the receipt tokens take a $30,000 basis.
• Under the non-exchange view, there is no gain on deposit, and your 10 underlying units keep their $15,000 basis.
• Under either view, the 0.3 additional tokens are most defensibly treated as income as they arrive, at their value on each date, which becomes their basis.

The two views put $15,000 of gain in different years. That gap is the stake, and it is why the choice should be made deliberately and documented.

Where it goes on the return

Staking reward income that is not business income is reported as ordinary income on Schedule 1. Dispositions go on Form 8949. Because brokers are not required to report these transactions under Notice 2024-57, expect no Form 1099-DA for the deposit, the rewards, or the redemption. See where to report crypto and answer the digital asset question Yes for any year with rewards.

Unsettled law is not permission to ignore the activity. It is permission to choose among reasonable answers, as long as you choose openly.

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