Proof-of-stake rewards are gross income in year of receipt

The Tax Court held that proof-of-stake rewards a taxpayer received for staking cryptocurrency held in a digital asset account were gross income under Sec. 61 in the year he received them.

Facts: During 2021, Alvie Paschall owned an account with eToro USA LLC, a digital asset platform, holding tokens in the cryptocurrency cardano, which used a proof-of-stake protocol to validate its blockchain. In 2020, eToro implemented a staking service for all customers who held cardano tokens; however, customers could opt out. Paschall never opted out, and monthly staking rewards in the form of additional cardano tokens were added to his account throughout 2021, the tax year at issue. The staking reward tokens were indistinguishable from the original tokens Paschall held in his account, and he could have sold them for cash at any time. In November 2021, eToro notified customers that it would delist cardano from its service in early 2022 and restricted Paschall’s ability to transfer the tokens to another account or platform through the end of 2021. He was, however, free to sell his tokens and convert them to cash. Paschall did not sell any of the tokens during that time and transferred them in 2022 to another platform.

For tax year 2021, eToro issued Paschall a Form 1099-MISC, Miscellaneous Information, reporting $33,354 in other income attributable to the staking rewards he received. The form was sent to Paschall’s prior address. He did not become aware of it until November 2023, when the IRS issued him a Notice CP2000, which proposed adjustments to his 2021 tax liability. He timely petitioned the Tax Court for a redetermination.

Issues: The IRS and Paschall stipulated that during 2021, Paschall’s account received staking rewards valued at $33,354. The issue before the court was whether the staking reward tokens that he received in 2021 were taxable upon receipt.

Sec. 61(a) provides that “gross income” means “all income from whatever source derived.” In Glenshaw Glass Co., 348 U.S. 426 (1955), the Supreme Court held that gross income includes all accessions to wealth realized and over which the taxpayer has complete dominion and control. Regs. Sec. 1.451-1(a) directs cash-basis taxpayers to report income for the earliest year in which they actually or constructively receive it. Unless it is subject to a substantial limitation or restriction, income is constructively received by taxpayers in the tax year in which it is credited to their account, set apart for them, or otherwise made available so that they may draw upon it at any time (Regs. Sec. 1.451-2(a)).

Paschall argued that he did not have dominion and control over the staking rewards because eToro had restricted his ability to transfer the tokens to another wallet or platform from November 2021 through the end of the year.

The Tax Court disagreed. In particular, the court found that Paschall could have converted the tokens to cash at any time and that the Supreme Court had emphasized in Helvering v. Horst, 311 U.S. 112 (1940), that the “power to dispose of income is the equivalent of ownership of it.” Ultimately, the court reasoned that even though Paschall was able to sell the staking rewards, it was his choice not to do so, and eToro’s restriction on transferring the tokens to another wallet did not “negate Mr. Paschall’s accession to wealth upon his receipt of the staking rewards.”

Citing Eisner v. Macomber, 252 U.S. 189 (1920), Paschall also argued that the staking rewards were similar to pro rata stock dividends and should not be taxed until realized through a sale or disposition. His position equated the staking rewards to growth or accretion in value.

However, the Tax Court saw a clear distinction between Paschall’s staking rewards and the stock dividend in Macomber, noting that the rewards Paschall received “increased his proportion of all outstanding Cardano tokens.” Unlike with a stock dividend, cardano token holders did not all automatically receive staking rewards in proportion to their ownership; they had to participate in the proof-of-stake protocol. Furthermore, cardano tokens may have been traded on other platforms with different approaches to staking or held in unhosted wallets, which may not have been staked and would not have received staking rewards. In rejecting Paschall’s argument, the court held that the rewards that Paschall received increased the overall value of his position in cardano by $33,354, the value stipulated by the IRS and Paschall, and that they could have been converted to cash at any time.

Paschall also advanced the argument that the rewards constituted self-created property, like a baker’s cake or a writer’s book, that yielded income only when sold. The court was not persuaded, noting that although the reward tokens may have been newly created, “the stakers are not the ones who created them.” Additionally, Paschall was not the owner or operator of a staking pool and did not have the authority to decide if and when the property was created.

Finally, Paschall argued that Rev. Rul. 2023-14, in which the IRS addressed the inclusion in gross income of rewards received for staking cryptocurrency on a proof-of-stake blockchain, did not apply in his case (citing Loper Bright Enterprises v. Raimondo, 144 S. Ct. 2244 (2024)) and that any reliance on it was misplaced. Additionally, Paschall argued that guidance issued in 2023, such as the revenue ruling, cannot be applied retroactively to tax year 2021. Rev. Rul. 2023-14 states that “the fair market value of the validation rewards received is included in the taxpayer’s gross income for the taxable year in which the taxpayer gains dominion and control” over the rewards. The Tax Court determined that it need not address this argument, because neither the IRS’s arguments nor the court’s conclusion relied on Rev. Rul. 2023-14; rather, they were based on Sec. 61 and related case law.

Holding: The Tax Court held that proof-of-stake rewards that Paschall could have converted to cash without any sale restrictions constituted gross income under Sec. 61 and were taxable in the year that the rewards were added to his account. The court rejected Paschall’s arguments that a restriction on transferring the rewards to another account or platform defeated his dominion and control over the rewards, that staking rewards should not be taxed until realized through a sale or disposition similar to stock dividends, and that the rewards constituted self-created property from which income should not be realized until they were sold.

• Paschall, T.C. Memo. 2026-46

— Matthew Geiszler, Ph.D., is a senior lecturer in accounting in the Brooks School of Public Policy, and John McKinley, CPA, CGMA, J.D., LL.M., is a professor of the practice in accounting and taxation in the SC Johnson College of Business, both at Cornell University in Ithaca, N.Y. To comment on this column, contact Paul Bonner, the JofA’s tax editor.