Tax Treatment for Staking Activities and Implications for Trusts

Posted: November 18, 2025
Updated: November 19, 2025
Derren Joseph

I. INTRODUCTION AND EXECUTIVE SUMMARY

The Office of Chief Counsel of the Internal Revenue Service (IRS) has issued a Revenue Procedure 2025-31 (the “Memorandum”), addressing the federal income tax treatment of “staking” activities conducted by a trust in the context of a proof-of-stake (PoS) blockchain protocol. The Memorandum concludes that the rewards received by a trust for these validation services constitute gross income at the time of receipt, measured by the fair market value of the rewards. This guidance provides critical, albeit narrow, clarity on a previously unsettled area of digital asset taxation and carries immediate implications for trusts, estates, and other entities engaged in similar activities.

II. ANALYSIS OF THE MEMORANDUM’S LEGAL RATIONALE

A. Factual Context and Holding

The Memorandum analyzes a scenario where a trust, acting as a validator on a PoS blockchain, receives newly created digital assets as compensation for its services. The IRS definitively rejected the argument that these rewards are created with a zero basis and are only taxable upon a subsequent disposition or sale. Instead, it applied the foundational principle of federal income tax law under § 61 of the Internal Revenue Code: all accession to wealth, clearly realized, and over which the taxpayer has complete dominion, constitutes gross income.

B. Application of the "Dominion and Control" Doctrine

The IRS’s analysis hinges on the application of the “dominion and control” standard, as articulated in Commissioner v. Glenshaw Glass Co. The Memorandum reasons that the trust, upon validation of a new block, has an unconditional right to the staking rewards. The trust exercises sufficient dominion and control over the rewards at the moment of receipt to trigger the realization of income, irrespective of whether the assets are immediately sold.

C. Character and Valuation of Income

Character: The Memorandum characterizes the staking rewards as ordinary income, not as capital assets at the time of receipt. This treatment aligns with the IRS’s view of the activity as a service-providing enterprise. The subsequent sale of the rewards would then generate a capital gain or loss, with the holding period commencing upon receipt.
Valuation: The amount included in gross income is the fair market value of the digital asset, denominated in U.S. dollars, as of the date and time of receipt. This presents a significant administrative burden for taxpayers, requiring them to track and value often volatile assets at the precise moment of acquisition.

III. IMPLICATIONS AND CONSIDERATIONS FOR TRUSTS AND FIDUCIARIES

A. Fiduciary Duty and Tax Compliance

For trustees, the Memorandum elevates the tax compliance obligations associated with staking activities from a matter of discretion to one of clear fiduciary duty. A trustee’s failure to account for staking rewards as annual gross income could expose the trust to penalties, interest, and potential allegations of a breach of fiduciary duty for mismanaging the trust’s tax liabilities.

B. Distinct Treatment from Mining

While the Memorandum is specific to PoS validation, its legal reasoning—rooted in the principles of § 61 and Glenshaw Glass—creates a persuasive, if not binding, precedent that may be applied by the IRS to other forms of digital asset acquisition, including proof-of-work mining. The key distinction lies not in the underlying technology, but in the application of the “dominion and control” test at the moment a taxpayer receives a new asset as compensation for services.

C. Unresolved Legal Questions

The Memorandum leaves several critical questions unaddressed, including:

The deductibility of expenses incurred by the trust in conducting staking activities (e.g., computing infrastructure, utilities).
The applicability of this ruling to individual validators operating outside of a trust structure, though the underlying tax principle is universally applicable.
The potential for a challenge based on the “claim of right” doctrine, which remains a topic of ongoing debate within the tax community concerning digital assets.

D. Unanswered Questions

The revenue procedure leaves open some important questions, including:

IRAs and other tax-exempt entities are subject to tax on “unrelated business taxable income.” The revenue procedure explicitly declines to address whether staking income (including income earned through a crypto ETF) would be UBTI, although its conclusion that a grantor trust can engage in staking activities suggests that staking activities do not constitute a business.
Foreigners are subject to US income tax on income “effectively connected” with a US trade or business. The revenue procedure explicitly declines to address whether staking income (including income earned through a crypto ETF) would subject foreigners to US income tax, although, again, its conclusion that a grantor trust can engage in staking activtiies suggests that staking activities do not constitute a business.
Foreigners are subject to 30% US withholding tax on “US-source” income that is not connected with a US trade or business. The revenue procedure does not address whether staking income (including income earned through a crypto ETF) would subject foreigners to withholding tax. Accordingly, sponsors might wish to ensure staking providers conduct all activities offshore to mitigate withholding tax risk. Even then, it remains to be seen whether brokers and other paying agents will withhold on crypto ETF distributions out of an abundance of caution.
U.S. individuals generally are not entitled to deduct investment management fees and other “miscellaneous itemized deductions.” Nevertheless, historically, many custodial staking providers have sent 1099s to customers that net out their fees, which results in an effective deduction. If a staking provider earns $100 of staking rewards on behalf of a crypto ETF and retains $5 of the rewards as a fee, it is unclear whether the crypto ETF’s 1099s will report $95 of rewards (effectively deducting the staking provider’s fees) or $100 of rewards and $5 of nondeductible miscellaneous itemized deductions.

IV. CONCLUSION AND STRATEGIC RECOMMENDATIONS

We recommend the following actions:

Implement Robust Tracking Systems: Establish accounting protocols to capture the date, time, and fair market value of every staking reward received.
Review Prior Period Filings: Consider the necessity of amending prior-year tax returns if staking rewards were not reported as gross income.
Document Expenses: Meticulously document all associated expenses for potential deduction, pending further guidance.
Seek Counsel: Engage with qualified tax legal counsel to structure staking operations in a manner that ensures compliance and strategically manages tax liability.

The issuance of this Memorandum signals the IRS’s focused attention on the digital asset ecosystem. Proactive and precise compliance is now the standard of care for fiduciaries in this domain.

Disclaimer:

This memorandum is for informational purposes only and does not constitute legal advice. The application of this guidance to your specific situation may vary. You should consult with qualified legal counsel concerning your particular circumstances.

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Derren Joseph

Derren works with International Entrepreneurs, Expats and Investors who are exposed to multiple jurisdictions. Tax optimization. Asset Protection. Compliance Obligations. Strategies include second citizenships, second residencies, trusts, foundations, insurance wrappers and other offshore structures.

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The Americas

The UK and The EU

The UAE

Africa

U.S. Tax Services

Corporate and Business Structures

Powerful Offshore Structures

Tax Treatment for Staking Activities and Implications for Trusts

I. INTRODUCTION AND EXECUTIVE SUMMARY

A. Factual Context and Holding

B. Application of the "Dominion and Control" Doctrine

C. Character and Valuation of Income

A. Fiduciary Duty and Tax Compliance

B. Distinct Treatment from Mining

C. Unresolved Legal Questions

D. Unanswered Questions

IV. CONCLUSION AND STRATEGIC RECOMMENDATIONS

Disclaimer:

Table of Contents: Tax Treatment for Staking Activities and Implications for Trusts

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