Background
On 6/4/26, the U.S. Tax Court held that cryptocurrency staking rewards received by a taxpayer were includible in gross income upon receipt (IRC Sec. 61; Paschall v. Commissioner, T.C. Memo 2026-46). In this case, cryptocurrency token holders did not automatically receive staking rewards in proportion to their ownership but instead had to stake their tokens and risk potential forfeiture.
The taxpayer, who used the cash method of accounting, had dominion and control over his cryptocurrency tokens upon receipt of staking rewards. As a result, the Tax Court held that the staking rewards were taxable income upon receipt. Once received, the staking rewards were not subject to any sale restrictions and could be converted to cash at any time.
What Is Cryptocurrency? A Refresher
Cryptocurrency does not exist in physical form but as computer code that is stored on a blockchain (i.e., a distributed ledger). It is virtual currency that uses cryptography to secure transactions that are then digitally recorded on a blockchain. The blockchain prevents modifications to the transactions once recorded and validated. Units of cryptocurrency include coins and tokens that have an identifiable value in U.S. dollars. Convertible virtual currency has an equivalent value in real currency or acts as a substitute for real currency (Notice 2014-21). Convertible virtual currency is treated as property for federal income tax.
According to the Tax Court in Paschall, cryptocurrencies use two protocols to validate transactions on the blockchain and distribute new tokens: proof of work and proof of stake. In proof of stake, token holders “stake” their tokens as collateral.
Cryptocurrency Includible in Gross Income
Under IRC Sec. 61(a), gross income is all income from whatever source derived. Gross income includes, but is not limited to, compensation for services, gross income derived from business, and gains from dealings in property.
In Rev. Rul. 2023-14, the IRS determined 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 validation rewards,” and that the fair market value of the rewards would be determined as of that date.
A taxpayer who receives cryptocurrency as a payment for goods or services or who mines cryptocurrency must include the fair market value of the cryptocurrency in the taxpayer’s gross income in the taxable year the taxpayer obtains dominion and control of the cryptocurrency (Notice 2014-21).
Paschall v. Commissioner
On October 1, 2020, eToro USA, LLC, a digital asset platform, announced a staking service for customers who held Cardano tokens. Cardano is cryptocurrency that uses a proof-of-stake blockchain. eToro executed the staking process on behalf of its customers. By default, customers’ Cardano tokens were staked; however, customers could opt out of the staking service. Customers who opted out did not receive staking rewards. Customers retained ownership of their tokens, regardless of whether their tokens were staked. Customers received staking rewards in proportion to the number of tokens they held in their eToro accounts. eToro distributed the staking rewards monthly in the form of Cardano tokens.
During 2021, a taxpayer was the sole owner of an account with eToro, and this account held tokens in Cardano. The taxpayer’s tokens were staked through eToro during the entire 2021 tax year, and the taxpayer never opted out. Cardano tokens were added to the account as monthly staking rewards; the taxpayer was not required to accept them. The taxpayer could sell any of their Cardano tokens for cash at any time. In 2022, the taxpayer transferred the Cardano tokens to another platform.
The taxpayer filed a petition for redetermination of deficiency and accuracy-related penalty for failure to report $33,354 in other income attributable to cryptocurrency staking rewards.
The Tax Court held the following:
- Since the taxpayer had dominion and control over the cryptocurrency upon receipt of staking rewards, the staking rewards were taxable income upon receipt;
- The staking rewards increased the taxpayer’s proportion and value of his interest in the cryptocurrency and were taxable upon receipt; and
- The staking rewards were not self-created property; therefore, tokens created through staking were taxable income upon receipt rather than upon sale.
A taxpayer computing taxable income under the cash-basis method of accounting must report income for the earliest year that they actually or constructively received the income [Reg. 1.451-1(a)].
Conclusion
In Paschall, the Tax Court determined that a cash-method taxpayer was required to include staking rewards as taxable income upon receipt since (1) the taxpayer had dominion and control over the cryptocurrency upon receipt of the staking rewards; (2) the staking rewards increased the taxpayer’s proportion and value of his interest in the cryptocurrency; and (3) the staking rewards were not self-created property.
Editor’s Note: The full article presented above is available in the Practitioner’s Tax Action Bulletin, as National Tax Advisory Memo (NTA-1374), first published in Issue 17 Dated September 8, 2026, along with other valuable tax practitioner articles. Contact Our Sales Team for a Subscription to Checkpoint’s bimonthly Practitioner’s Tax Action Bulletin, which is available in print, and online or to add Thomson Reuters Planner CS to your advisory toolkit.
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