In today’s episode of Adam Talks, Adam Bergman, Esq. discusses Notice 2013-14, which offers guidance about how crypto staking is taxed and how it affects your IRA.
Staking, Taxes & Your Self-Directed IRA
On this episode of Adam Talks, Adam Bergman discusses the recently released IRS ruling on the taxation of staking in cryptocurrencies. Staking involves users pledging their cryptocurrencies to a blockchain to validate transactions and receive native tokens as rewards. The ruling clarifies that staking rewards for cash method taxpayers must be included in taxable income when they gain control over the rewards. This applies to both direct staking and receiving tokens through staking on an exchange. The ruling focuses on dominion and control as the determining factor for taxation, rather than when the rewards are received.
The guidance provided by the IRS ruling offers valuable clarification for individuals engaging in staking activities. It highlights the importance of dominion and control as the date when the rewards become freely transferable for determining the taxable value of the rewards. Additionally, the ruling provides potential tax benefits for those utilizing retirement accounts for staking.
Bergman also explores the taxation of staking in IRAs and 401(k) plans. He suggests that if the staking activity does not rise to the level of a trade or business, there would not be any taxation for retirement plans. Since these retirement accounts do not pay taxes or file tax returns, there should be no Unrelated Business Income Tax (UBIT) if the staking is passive or a one-off transaction. Not being subject to UBIT is considered a significant advantage.
Bergman also mention that the guidance does not address certain aspects such as gas fees paid or the valuation of units received as staking rewards. He anticipates further guidance from the IRS in the future as they focus on the taxation of cryptocurrencies to address concerns about unreported income.
Overall, this episode emphasizes the potential tax advantages of conducting staking activities within a retirement account, as long as they do not rise to the level of a trade or business. Bergman suggests that utilizing a Self-Directed IRA can be a favorable option to avoid tax reporting headaches associated with cryptocurrency gains. He anticipates further discussions on this topic in future podcasts and blog posts. To learn more, listen to the podcast!