Cryptocurrency staking rewards are income in year received

The Tax Court held that rewards that a taxpayer received from cryptocurrency staking through a digital asset platform were includable in the taxpayer’s gross income in the year he received the rewards.

Blockchain validation protocols — proof of work and proof of stake

In its opinion, the Tax Court first briefly explained the relevant cryptocurrency concepts involved in the case, including blockchain validation protocols. Cryptocurrencies typically use one of two consensus protocols to validate the blockchain and distribute new tokens: proof of work and proof of stake. A proof–of–work protocol, used by cryptocurrencies such as bitcoin, requires participants (miners) to solve complex mathematical problems relating to recent unverified transactions. Once a miner solves the problem, the solution is broadcast to other nodes that verify that the solution is correct. If the solution is accepted, the successful miner usually receives a reward of the same type of token.

A proof–of–stake protocol, used by cryptocurrencies including ether and tezos, requires comparatively less computational effort to validate the blockchain, with no miners being involved. Instead, token holders who wish to validate transactions (stakers) lock up (stake) tokens as collateral. Stakers are selected by algorithm to confirm the validity of new blocks to the blockchain, based on the quantity of tokens they have staked, the length of their tenure as validators, or random selection. If stakers are selected and they successfully validate transactions, they receive rewards of the same type of token. However, they risk forfeiting staked tokens if they dishonestly or incorrectly validate transactions.