Tax Court Upholds Income Tax on Cryptocurrency Rewards

Why It Matters

The tax code treats virtual currency as property, not currency, triggering income recognition events that many taxpayers never anticipated, according to a Congressional Research Service (CRS) report published September 2. The stakes are immediate: a recent Tax Court ruling upheld staking income taxation, a pending case challenges the same principle, and Congress is drafting bills to overturn what it views as punitive rules. The current administration and Congress have been revisiting the scope of broker reporting rules, especially regarding decentralized finance (DeFi) platforms and the definition of ‘broker’, and a White House working group has suggested Treasury issue guidance addressing de minimis treatment of digital assets received via airdrops, staking, hard forks, and mining.

The Big Picture

The IRS declared in 2014 that virtual currency would be treated as property for federal tax purposes, establishing a framework that applies general property tax principles to digital assets. The Infrastructure Investment and Jobs Act codified this approach in 2021 by defining “digital asset” in the tax code as “any digital representation of value which is recorded on a cryptographically secured distributed ledger or any similar technology as specified by the Secretary” of the Treasury.

Miners must include the fair market value of newly mined cryptocurrency in gross income on the date of receipt, and if mining is a trade or business, net earnings face self-employment taxes. The IRS extended the same logic to staking, ruling that validation rewards are includible in gross income when a taxpayer has “dominion and control” over them, valued at fair market value on that date.

On June 4, the U.S. Tax Court ruled in Paschall v. Commissioner that a cash-method taxpayer’s staking rewards were includible in gross income upon receipt. The husband in that case received $33,354 in Cardano tokens as staking rewards through the eToro platform in 2021. The IRS assessed a $24,599 income tax deficiency and a $4,920 accuracy-related penalty. The Tax Court rejected arguments that staking rewards resembled stock dividends or self-created property and thus should be taxed only upon disposition, finding instead that a token holder’s proportionate share of outstanding tokens increased upon receipt of rewards.

In Jarrett v. United States, a dispute over the 2020 tax year, cross-motions for summary judgment are pending as of August 3.

Under Revenue Ruling 2019-24, if a taxpayer holds cryptocurrency that undergoes a hard fork but receives no new tokens, there is no gross income. If the taxpayer receives new tokens via an airdrop following a hard fork and can immediately dispose of them, those tokens constitute gross income at their fair market value upon receipt. IRS Chief Counsel Advice 202444009 ruled that if rewards were credited to the taxpayer’s account before a platform filed for Chapter 11 bankruptcy and froze customer accounts, the taxpayer still had gross income.

The Bottom Line

Congress is moving to rewrite the rules. H.R. 10357 (the Digital Asset Tax Certainty Act) was ordered to be reported out of the House Committee on Ways and Means on September 16, 2026. The Tax Clarity for Mining and Staking Act would permit taxpayers to defer income recognition from mining and staking until disposition of tokens. The Charitable Deductions for Digital Asset Donations Act would exempt “widely traded digital assets” from qualified appraisal requirements for charitable contributions. A White House working group has suggested Treasury issue guidance addressing de minimis treatment of digital assets received via airdrops, staking, hard forks, and mining.

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