On July 31, 2023, the IRS issued Revenue Ruling 2023-14, which sets forth the IRS’s position as to when certain staking “rewards” are taxable income.
The Ruling analyzes a fact pattern where a cash method taxpayer “stakes 200 units of [token] M and validates a new block of transactions on the M blockchain, receiving 2 units of M
as validation rewards.” The Ruling concludes that the taxpayer must include the “fair market value of the validation rewards received” in gross income during “the taxable year in which the taxpayer gains dominion and control over the validation rewards.”
However, what the Ruling does not say is far more significant than what the Ruling does say.
First, the facts that the IRS rules on do not state that the tokens are newly created property with respect to which the taxpayer is the first owner. Not all staking arrangements involve newly created property; there are many situations where a person engaged in staking receives tokens from a preexisting pool of tokens (and is “paid” such tokens for providing services by a governance foundation, or the like). To the extent the Ruling simply stands for the proposition that a taxpayer who receives preexisting tokens from another party recognizes income at the time the taxpayer gains dominion and control over those tokens, we agree.
The Ruling does mention, as background, that “validation rewards typically consist of one or more newly created units of the cryptocurrency native to that blockchain.” But this statement is conspicuously absent from the facts that the IRS rules on.
Second, the Ruling’s application of the landmark U.S. Supreme Court case Commissioner v. Glenshaw Glass Co. is silent as to a necessary element of the Court’s holding. Glenshaw Glass sets forth the classic definition of income, requiring “instances of undeniable accessions to wealth, clearly realized, and over which the taxpayers have complete dominion” (emphasis added.). The Ruling concludes that the taxpayer acceded to wealth, and states that the taxpayer has income when it gains complete dominion over the tokens, but the Ruling is conspicuously silent about clear realization.
Thus, even if the Ruling is construed as applying to situations where a staker creates new tokens and is the first owner of such tokens, the Ruling never concludes, as it must under Glenshaw Glass, that the taxpayer has a realization event. The Ruling also fails to address a century of other caselaw and guidance that supports the non-taxability of self-created property. The IRS cannot, of course, unilaterally override the Supreme Court and other judicial opinions.
Finally, we note that revenue rulings are not binding law; they merely reflect the IRS’s opinion of the law. Courts (and in particular the Tax Court) generally do not defer to the IRS’s analysis in a revenue ruling.
This Ruling marks the first time the IRS has stated any published position on staking and comes three business days after oral argument in the Sixth Circuit in Jarrett v. United States, in which Fenwick is representing the plaintiff, who created new tokens through staking. The Ruling’s analysis circumvents key factual and legal issues regarding whether newly created tokens through staking should be subject to taxation at the time of creation.