Crypto Staking Rewards - "Dominion and Control"

[asdfasdf4]

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):

1. I execute a "stake" transaction - specifying that the 1,000,000 PA tokens are to be staked to Validator A
2. the "stake" transaction succeeds
3. 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.
4. 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.
5. 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.
6. 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.
7. This goes on for a full year
8. After the year is done I decide to stop staking
9. 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
10. The "unstake" transaction succeeds
11. 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.
12. The 12 day cool down period has now passed
13. I execute a "claim" transaction
14. The claim transaction succeeds
15. 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?

[asdfasdf4]

bump

[asdfasdf4]

Hi @JotikaT2 - I am curious if you'd be willing to take a look at my question and provide your expert recommendation? If this topic is not your area of expertise would you be able to tag someone who can assist? 

[asdfasdf4]

@KarenR would you be able to review my question and provide your expertise?

[JotikaT2]

If the reward from staking is for additional tokens, it would be treated as ordinary income and reported according to these instructions.

If the reward from staking represents an increase in the value of tokens already held, then it would be reported as capital gains.  

How do I enter my crypto in TurboTax provides a guide to assist you with entering the information into TurboTax.

Please refer to this link for an overall guide to cryptocurrency as TurboTax has put together a guide to help with most crypto questions and situations you may face.

Since this is a public online forum, discussing specific transactions would not be beneficial as it could result in confidential information being exposed.  TurboTax does have an option you may benefit from.  Please see this link for a possible option where you can connect with a TurboTax Expert for specific guidance as it relates directly to your crypto transactions.

[asdfasdf4]

@JotikaT2  Thank you for the reply. Could you please speak to my question regarding "Dominion and Control" - it is based on IRS Ruling 2023-14 - https://www.irs.gov/pub/irs-irbs/irb23-33.pdf