This article outlines the income tax treatment of cryptocurrency staking income. It includes examples of how cryptocurrency staking rewards are taxed as well as disposing of the underlining crypto.
Staking cryptocurrency is becoming more popular with specific providers such as Celsius or BlockFi paying users between 3- 12% pa. Users can choose which token to deposit (“stake”) to these platforms. Staking is also available on some exchanges (such as Binance or Kraken) for some tokens. However, it is not without risk.
Intention at Acquisition
If cryptocurrency is purchased with an intention to earn staking rewards, it is likely any increase in value of cryptocurrency is taxable income on disposal.
IRD considers cryptocurrency different to shares, or rental property’s where the owner receives a cash dividend of rental income stream (in fiat). This is a clear distinction due to the classification of crypto as property.
We have previously published information about intention and why cryptocurrency is likely to be taxable on disposal.
Financial Arrangements
There is some uncertainty whether staking activity is a financial arrangement (which would result in unrealized gains being taxable). We will publish more information on financial arrangements in a future post. Update: Inland Revenue has recently amended tax legislation to make cryptocurrency an excepted financial arrangement. The outcome is that cryptocurrency staking arrangements will not be subject to financial arrangement legislation.
A Disposal?
A transfer from one cryptocurrency wallet to another wallet is not a taxable event because the taxpayer still owns the cryptocurrency, and it hasn’t been disposed of. However, the terms and conditions of these centralized platforms outline that by depositing cryptocurrency with them, you give up the rights to ownership. Practically, this makes sense as it allows the platform to then on-lend to the borrower. The lending of the same cryptocurrency to the borrowing is where the risk of these platforms come into play. For example, what if the borrower doesn’t repay their loan, or cryptocurrency prices decrease, the platform is hacked and crypto stolen?
This creates an interesting tax perspective, by giving up ownership, is the taxpayer disposing of their cryptocurrency? And therefore, is this a taxable event?
My current view is that it is not a disposal; however, IRD may disagree and are currently unsure of their tax position. The key reason why I believe it isn’t a disposal is that the taxpayer isn’t receiving any consideration (nothing in return) for disposing of their cryptocurrency. If it was a disposal, the sale value would be zero dollars, and the taxpayer would claim a deduction for their original purchase price. Also, the taxpayer is going to receive rewards from making the deposit. They can’t receive rewards if they don’t own the underlying asset. You can’t receive rent from a property, dividends from a share, or interest from a term deposit if you don’t own the property, shares or term deposit.
Overview
An individual needs to have already purchased cryptocurrency to be able to stake it.
A person is taxed on the receipt of cryptocurrency when received from staking (as outlined below in Part B), and again on the disposal (when sold or traded in the future as outlined below in Part C).
When disposed, a deduction for the original cost value is attributed to the token. The cost value is equal to the value of the token at the time it was received (in respect of which tax has already been paid). There is no double tax.
Example 1
Throughout example 1, the price of ABC cryptocurrency token will remain at $1 for simplicity.
Part 1.A: Original Acquisition of Cryptocurrency
Sarah purchases 100 ABC tokens for $1 each. Buying cryptocurrency is not a taxable activity – only when disposing.
The financial statements would show:
Purchases $100
Closing Stock $100
Gross Profit –
Part 1.B: Receiving Cryptocurrency (Income) from Staking
Sarah stakes 100 ABC tokens, receives 50 ABC tokens from staking, and the market value of the time she receives the tokens were $1.
During the year she received 50 ABC tokens valued at $1 each from staking income. The $50 worth of ABC tokens received is taxable income.
At the same time, the acquisition of the 50 ABC tokens is also purchased because she has acquired the tokens. The staking tokens are not ‘ring fenced’ or separated from the original cryptocurrency on hand. They will be added to the tokens on hand and the weighted average cost value will be adjusted.
At the end of the financial year Sarah owns 150 ABC tokens which continued to be valued at $1 ($150 total).
The financial statements would show:
Staking Income: $50 (50 ABC tokens received at $1 each)
Opening Stock $100 (original 100 ABC tokens purchase for $1)
Purchases $50 (50 ABC tokens acquired from staking at $1 each)
Closing Stock $150 (150 ABC tokens at an average price of $1 each)
Gross Profit $50
Part 1.C: Disposing Cryptocurrency
Sarah disposes her 150 ABC tokens for $1 each.
The financial statements would show:
Sales $150 (sale of 150 ABC tokens for $1)
Opening Stock $150 (closing stock from part B being the original 100 ABC tokens + staking income)
Closing Stock –
Gross Profit –
There is no profit on this disposal of the tokens in Part C because she has sold them at the same price as the original acquisition cost.
$100 of the sale price is Sarah’s original capital, and the other $50 is taxable in part B when the staking income is received. There is no double tax.
Note: the taxable event of part C only occurs when the cryptocurrency is disposed (sold or traded). This could be immediately upon receipt from the staking, or in the future for a different value.
Example 2
Example 2 will follow a staking cycle with increasing token value fluctuations.
Part 2.A: Original Acquisition of Cryptocurrency
David purchases 100 ABC tokens for $1 each.
The financial statements would show:
Purchases $100
Closing Stock $100
Gross Profit –
Part 2.B: Receiving Cryptocurrency (Income) from Staking
David stakes 100 ABC tokens, receives 30 ABC tokens from staking, and the average token value when he received his staking rewards was $4. The market value at the end of the financial year was $6 per ABC token.
During the year David has received 30 ABC tokens value at $4 each from staking. The $120 worth of ABC tokens received is taxable income. At the same time, the acquisition of the 30 ABC tokens is also a purchase (because he has acquired the tokens) at the same value of $120.
At the end of the financial year David owns 130 ABC tokens with a cost value of $220 (or $1.69 per token). The market value is irrelevant for tax purposes.
The financial statements would show:
Staking Income: $120 (30 ABC tokens received at $4 each)
Opening Stock $100 (original 100 ABC tokens purchase for $1)
Purchases $120 (30 ABC tokens acquired from staking at $4 each)
Closing Stock $220 (130 ABC tokens at an average price of $1.69 each)
Gross Profit $120
Part 2.C: Disposing Cryptocurrency
David disposes 130 ABC tokens for $10 each.
The financial statements would show:
Sales $1,300 (sale of 130 ABC tokens for $10)
Opening Stock $220 (closing stock from Part B being the original 100 ABC tokens + 30 tokens from staking at the value when received)
Closing Stock – (all tokens sold)
Gross Profit $1,080
In this situation, only the additional increase in value from the staking income is taxable income when the tokens are disposed.
From the sale value of $1,300, $100 was David’s original capital investment, and $120, was the staking income in part 2.B. This results in the balance of $1,080 being taxable on the final disposal.
Example 3: Immediate Disposal of Cryptocurrency from Staking
Steven earns 1 ETH token from staking which has a value of $1,000 at the time. He immediately decides to sell the cryptocurrency on the same day. At the time he sells the ETH the market value remains at $1,000.
Part A: the value of the cryptocurrency when received is $1,000. Steven has taxable income of $1,000.
Part B: Steven sells the ETH for $1,000. The profit is calculated by the sale price of $1,000 less the cost basis of $1,000 which results in no profit.
As demonstrated above, there is no double taxation Steven pays tax on the $1,000 being the market value of ETH when it was earned from staking and because there was no price increase/decrease between acquiring the cryptocurrency and disposing the cryptocurrency there is no further taxable events to consider.
Contact Us
Contact Tim Doyle for a call or meeting to discuss any cryptocurrency tax or accounting questions. Our office is in Cambridge, Waikato, or we can arrange a video conference call.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
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