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limited and does not address mining anyone can participate in the mining
or staking. process in order to verify a transaction.
Notice 2014-21, In proof of stake, digital token own-
Should staking rewards be which addresses ers in the token ecosystem need to
considered taxpayer-created virtual currency and validate transactions in order to protect
property or income that should digital assets that they already own. If
be recognized upon receipt? convertible virtual they did not stake, they would be jeopar-
The concept of “income” is defined by currency, clarifies dizing the investment that they already
the Internal Revenue Code as well as in made in the blockchain. Thus, their
case law. Sec. 61 defines gross income that digital assets are participation in the validation process
as “all income from whatever source considered property is not a service that they are provid-
derived.” Eisner v. Macomber, 252 U.S. and not currency for ing as in a proof of work, but instead
189 (1920), defines income as “the gain it is a necessary process for the token
derived from capital, from labor, or from federal tax purposes. owners to actively participate in so that
both combined,” and Glenshaw Glass Co., they protect their current investment in
348 U.S. 426 (1955) defines income as taxpayer-created property. As previously the blockchain.
“undeniable accessions to wealth, clearly stated, in the proof-of-stake protocol,
realized, and over which the taxpayers validators are chosen based on their Staking rewards as current
have complete dominion.” economic investment in the blockchain. income
While not specifically stated any- Once a validator is chosen to produce a There is another argument that the stak-
where in the Code or related Treasury new block for the blockchain, his or her ing rewards, similar to mining rewards,
regulations, there is a fundamental con- staked tokens serve as collateral backing are not created property and instead
cept in tax law that the creation of prop- the veracity of the newly created block. should be considered income from
erty is not a taxable event in itself (e.g., a As a part of this process, the validator services performed. As services income,
baker who bakes a loaf of bread, an artist engages in the creation or minting of the argument goes, mining and stak-
who creates a painting, or a writer who new tokens that did not previously exist ing rewards should be taxed when the
produces a novel) and that a taxpayer and would not exist unless that valida- taxpayer has dominion and control over
does not recognize income until a real- tor participated in the process. This the reward tokens. While not explicitly
ization event takes place and income is validation process demonstrates that the stated in Notice 2014-21, this is likely
actually earned from a sale or exchange validator creates the new tokens, similar the position of the IRS and was the
of such property. For example, an artist to how a baker creates a loaf of bread. As position taken by the Department of
does not need to include the value of the baker would not need to include the Justice in its answer filed with the court
a finished sculpture as soon as he puts bread in his gross income until the bread in the Jarrett case.
down his chisel but, instead, will have to has been sold, a validator could argue Under this line of logic, the taxpayer
include any income from the sale of the that he or she would not need to include is receiving income in exchange for pro-
sculpture after the sale has been com- the new tokens minted through the viding transaction and security services
pleted and he receives payment for his proof-of-stake validation process in his to the blockchain and other users of the
sculpture. In the parlance of the case law, or her income until the tokens are sold digital asset. Instead of seeing this as a
it is the sale from which the “gain [is] or otherwise disposed of. baker in the community creating bread,
derived” that makes the income “clearly Additionally, unlike in a proof-of- perhaps the validator’s services would
realized.” (id. at 431). work blockchain, the validators of a instead be likened to a police officer or
The question here, then, is whether proof-of-stake blockchain have a vested civil servant providing a service to the
staking rewards should be considered interest in the blockchain, and staking community for a price paid for by the
taxpayer-created property or, on the is a means to protect and secure their entire community (via staking rewards).
other hand, income that should be rec- existing token value. A proof-of-stake The deposit of the staking reward into
ognized upon receipt. blockchain requires the participation the validator’s wallet address would be
from as many of its token holders as the realization event under the case law.
Staking rewards as possible in order to ensure a distributed
taxpayer-created property consensus mechanism that is resilient to Pros and cons
There is an argument that staking an attack from a bad actor. This is much Given the unique nature of each
rewards should be considered to be different than in proof of work, where blockchain and each validator’s unique

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