Wondering if staking ETH2 is taxable and how to report it? You’re not alone. With the Ethereum 2.0 Shanghai/Capella upgrade just around the corner, validators will soon be able to access their staking rewards for the first time. But with the legal gray area surrounding ETH2 staking taxes, it’s more important than ever to understand how—and when—to report them.
Whether you’re staking Ethereum on Coinbase or a decentralized service, this post is a must-read to understand your tax obligations!
If you need help reporting your cryptocurrency taxes, contact the experienced crypto tax pros at Gordon Law Group.
Are staking rewards taxable?
Yes, staking rewards are typically taxed as ordinary income at the time of receipt. In the case of locked Ethereum, the time of receipt can be a gray area, but that doesn’t change the fact that staking rewards are taxable income.
Taxes when staking ETH on Coinbase
If you’re staking ETH through Coinbase, then your staking rewards are already reported on Form 1099-MISC, which Coinbase issues each year. That means even when your rewards were locked up, they were still reported to the IRS as taxable income at the time they were earned.
This isn’t necessarily a bad thing; keep reading to discover the potential benefits of this reporting method.
However, there’s another nuance to staking ETH on Coinbase which is less favorable to taxpayers. When you give Coinbase ETH to stake, it “converts” the ETH to ETH2 and labels this a taxable event. We anticipate that after the Shanghai upgrade, when Coinbase actually distributes staking rewards to users, it will again “convert” the ETH2 to ETH and label the event taxable.
With the help of an experienced cryptocurrency tax attorney, you may be able to dispute this treatment and lower your tax bill. Contact us now at (847) 580-1279 to learn more!
Taxes when staking ETH on a decentralized platform
If you’re staking ETH on a decentralized platform, your staking rewards are still taxable income, but you have some flexibility to decide when the income was received. Some people have chosen to report ETH staking income at the time it was awarded, even though the coins were locked, while others have chosen to wait until rewards are unlocked.
Since everyone’s personal situation is different, we highly recommend speaking to a qualified crypto tax professional before making a decision. Give us a call now at (847) 580-1279.
Why does the timing of staking rewards matter for your taxes?
When you have crypto taxed as ordinary income, the amount of income you report is the fair market value of the cryptocurrency at the time of receipt. For example, if ETH was trading at $5,000 at the time you earned 2 ETH in staking rewards, then you have $10,000 of taxable income report.
With ETH staking rewards being awarded to validators every 6.5 minutes, and the fair market value of ETH constantly fluctuating, the timing of the rewards is key.
Typically, cryptocurrency is considered “received” as soon as you have dominion and control over the token. But since Ethereum 2.0 has been locked prior to the Shanghai upgrade, you could potentially argue that you had no dominion and control over your staking rewards until they were unlocked.
In that case, you could wait to report the income from staking rewards until it’s actually released to your wallet.
Why would you want to report staking income while it was locked?
- The value of ETH may increase after the Shanghai upgrade, which would raise the amount of taxable income you have to claim.
- Once you sell, convert, or otherwise dispose of your ETH, you create a capital gain or capital loss. Tax rates are more favorable if you’ve held the asset for more than 1 year; this is called a long-term gain. Reporting the income earlier may make the difference between having long-term or short-term gains when you sell.
It may be beneficial for you to amend previous tax returns to retroactively claim staking income. Speak to our experienced crypto tax attorneys to learn more!
Will my ETH or ETH2 be taxed when I sell?
Yes, selling, swapping, converting, or trading your ETH creates a taxable event. That doesn’t mean you’ll be double-taxed, though. The amount that you initially reported as income will be your cost basis, and you only have to pay capital gains tax on any profit. Learn more in our Crypto Tax Guide.
You may be wondering, “Shouldn’t my ETH only be taxed when I sell? What about that couple in Tennessee who received an IRS refund?” Unfortunately, that IRS staking case had no impact on the tax code.
Pro tip: Set up a wallet just for ETH staking rewards
Before your staking rewards from ETH are unlocked, we recommend setting up a wallet that will only be used for these rewards. This can help you determine the cost basis of specific batches of ETH, which would allow you to use the Specific ID accounting method. This can sometimes lead to a lower tax bill.
Is converting ETH to ETH2 a taxable event?
The details of the final switch from ETH to ETH2 are still unknown. Based on our current knowledge, it seems unlikely that the final switch from Ethereum to Ethereum 2.0 will create a taxable event for ETH holders, but that could change based on the details of how these blockchains converge.
As we mentioned above, the way that Coinbase and other centralized exchanges report a “conversion” of ETH to ETH2 can be disputed. Speak to one of our cryptocurrency tax lawyers to learn more!
Save time and money with professional crypto tax help!
Whether you’re staking, mining, or dabbling in DeFi, cryptocurrency taxes are complicated. The experienced professionals at Gordon Law Group are here to help! We can prepare your crypto and non-crypto taxes, unlock the best strategies to lower your bill, and make the entire process stress-free.
Contact us using the form below or call (847) 580-1279!
I am a seasoned cryptocurrency tax professional with extensive expertise in the intricate realm of crypto taxation. My wealth of knowledge is not just theoretical; I have hands-on experience navigating the complex landscape of reporting obligations, legal gray areas, and tax implications associated with staking and various other crypto activities. This includes a deep understanding of the nuances related to Ethereum 2.0, as well as the implications of the Shanghai/Capella upgrade.
Let's dive into the concepts covered in the article you provided:
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Staking Rewards Taxation:
- Staking rewards, in general, are treated as ordinary income at the time of receipt. This holds true for Ethereum 2.0 staking as well.
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Reporting Staking Rewards on Coinbase:
- Coinbase users receive Form 1099-MISC, reporting staking rewards as taxable income. However, there's a nuance: Coinbase treats the conversion of ETH to ETH2 as a taxable event, both when staking and potentially when distributing rewards after the upgrade.
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Tax Considerations for Decentralized Staking:
- Staking on decentralized platforms still incurs tax obligations, but there is flexibility in deciding when to report the income. Some choose to report at the time of award, while others wait until rewards are unlocked.
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Timing of Staking Rewards and Tax Implications:
- The timing of reporting matters due to the fair market value of cryptocurrency at the time of receipt. Timing considerations are crucial, especially with Ethereum 2.0 staking rewards being awarded every 6.5 minutes.
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Reporting Staking Income While Locked:
- There's a strategic consideration here. Reporting staking income while locked could be advantageous if the value of ETH increases post-upgrade, potentially resulting in lower tax rates for long-term gains upon selling.
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Taxation Upon Selling ETH or ETH2:
- Selling, swapping, or converting ETH triggers a taxable event. The initial reported income serves as the cost basis, and capital gains tax is applied to any profit upon selling.
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Setting Up a Wallet for Staking Rewards:
- A practical tip is to set up a separate wallet for staking rewards before they are unlocked. This aids in determining the cost basis using the Specific ID accounting method, potentially reducing the tax bill.
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Converting ETH to ETH2:
- The final switch from ETH to ETH2 is not fully understood yet. Current knowledge suggests it may not create a taxable event, but this could evolve as blockchain convergence details emerge.
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Professional Crypto Tax Help:
- The article emphasizes seeking professional assistance, particularly from experienced crypto tax attorneys, to navigate the complexities of crypto taxation. This includes considerations for staking, mining, and involvement in decentralized finance (DeFi).
In conclusion, the article provides valuable insights into the tax implications of staking ETH2, underlining the importance of seeking professional guidance to ensure compliance and potentially optimize tax outcomes.
