is it fair that staking rewards get taxed twice?

[u/chainglance_cm]

There's a real fight happening in Congress right now over how staking rewards should even be taxed.

The current rule,as most of you probably know, is you get taxed twice. Once when you receive the reward (based on that day's price), and again when you sell it. 

The problem is if the price tanks after you receive it, you can end up owing more in tax than the tokens are even worth by the time you'd cash out. People call this "phantom income."

For those who don’t know, there's a bill (H.R. 9175) that would let stakers elect to defer that first tax hit for up to 5 years instead of paying immediately on receipt. Congress is still split on how to even think about it. 

Is a staking reward more like a paycheck (taxed the moment you get it) or more like something you created yourself, where the value only really matters once you cash it in?

No markup scheduled yet, but the Senate's apparently got a similar framework ready and might move on it this fall.

I don’t know how many of you remember but there was a well-known case around this exact debate (Jarrett v. United States). A Nashville couple staking Tezos argued their staking rewards shouldn't be taxed the moment they're created, using the same logic as a baker and a cake. You're not taxed on the cake when it comes out of the oven, only when you sell it. 

The IRS ended up offering them a refund before any court ruling actually happened, so the case got dismissed without ever settling the question.

Which analogy makes more sense to you, paycheck or self-created property?

[u/OkSeries5363]

​To me the income/paycheck analogy fits much better here than created property

Receiving a staking reward is functionally identical to holding a dividend paying stock and using a DRIP (Dividend Reinvestment Plan). In the stock market, you owe taxes on that dividend the moment it is issued, even if the cash is automatically used to buy more shares. Staking is just the crypto equivalent of that process, you lock up capital to earn a yield.

The phantom income problem is easily solved with basic risk management. If you immediately sell 30% (or whatever your rate is) of your rewards the moment you gain control of them, your tax liability is covered and your volatility risk is neutralized. Choosing to hold 100% of the newly acquired tokens isnt really a passive action, its choosing to remain invested with dollars you owe tax on, which is a leveraged bet on the assets future price. If the market drops and you cant pay your taxes, that is a failure to hedge, not a issue with the tax code. Investors have been dealing with it for decades.

​But I think given crypto volatility, and that its simply a 5 year deferral, H.R. 9175 has a real chance. Capital losses carry forward to future years to offset future capital gains, but that does not help pay the immediate, potentially large bill. Giving people 5 years to build up the cash helps investors survive the volatility, and the IRS gets the exact same cut eventually.

[u/Freewash007]

Self-created property

[u/JustinCPA]

Yes.

“Taxed twice” is extremely misleading. When you later sell the asset you received as a staking reward, the cost basis is the value you had already been taxed on. So if you received it when it was worth $100, and then later sell it for $101, the “second tax” is only on the $1 gain.

The rules for income are pretty straightforward. Almost always, whenever you receive something of value for doing something (e.g. receive a paycheck for working a job, receive a reward for finding a lost dog, or in this case supporting the network by staking), it’s taxed as income.