Hello,
I have a crypto staking rewards question.
At what point is crypto staking rewards deemed taxable income?
I would like to start staking on a certain blockchain (for the sake of this question we can call it Project A or PA for short).
From my research on this topic I came across the key phrase "Dominion and Control" that has led me here to seek clarification. Keep this phrase in mind as I layout the example below for the staking process of PA.
- I have 1,000,000 PA tokens (note that right now I can freely transfer / sell them since they are not staked - I have full Dominion and Control of them)
- I decide to stake all 1,000,000 PA tokens to Validator A
- Validator A provides a 5% APY
- Rewards are given out every 12 minutes
- At the end of the year if I remained staked the whole time I would get 50,000 PA tokens as a reward
Terminology:
- "Dominion" - I interpret this as ownership - I have ownership of my initial staking amount and the rewards I receive due to the cryptography of the blockchain
- "Control" - I interpret this as being able to freely transfer / sell my tokens (initial staked amount and rewards)
With the above shared, the following are the steps needed to stake (note that along the way I will share if I have Dominion and Control of my rewards):
- I execute a "stake" transaction - specifying that the 1,000,000 PA tokens are to be staked to Validator A
- the "stake" transaction succeeds
- Now that I am staked I, at any time, am freely able to execute an "unstake" transaction. This "unstake" transaction will be laid out below in more detail.
- Since I am now staked I cannot freely transfer / sell any of my tokens - I have Dominion of my initially staked tokens due to cryptography but I do not have Control because they are locked up / staked and I cannot sell them.
- 12 minutes go by and I get a tiny reward (we can call it "Reward #1") - I have Dominion of these rewards due to cryptography but I do not have Control of them because they are locked up / staked and I cannot sell them.
- 12 more minutes go by and I get a tiny reward (we can call it "Reward #2") - I have Dominion of these rewards due to cryptography but I do not have Control of them because they are locked up / staked and I cannot sell them.
- This goes on for a full year
- After the year is done I decide to stop staking
- I execute an "unstake" transaction - specifying that the 1,050,000 PA tokens are to be unstaked from Validator A and given back to me
- The "unstake" transaction succeeds
- At this time I am now unstaked. I have Dominion of my initially staked tokens and the rewards due to cryptography but I do not have control (ie I cannot sell them) because they are held for a cool down period of 12 days.
- The 12 day cool down period has now passed
- I execute a "claim" transaction
- The claim transaction succeeds
- I now have full Dominion and Control of my initially staked tokens and the rewards because I can now freely transfer them and or sell them
At what point in the above process do I claim my staking rewards as taxable income?
