How do I list crypto staking rewards from 1099-MISC Box 3 on Schedule E?

[notreadytohireanaccountant]

I have income reported on 1099-MISC Box 3 (Other Income) for crypto staking rewards. Based on the references mentioned in this article (https://www.cointracker.io/blog/how-staking-tezos-may-generate-rental-income), I am taking the position that the cryptocurrency is personal property and that the rewards from staking this property should be treated as (passive) rental income.

Since it is listed as Box 3 income, I am have a hard time categorizing this as rental income when uploading the 1099-MISC. When I attempt to add the income manually using the Schedule E wizard, all of the information is related to land or building property and asks for a physical address and automatically adds depreciation, which is not applicable for this instance. 

1. Is there a way to categorize this income as rental even if it has been reported as Box 3 - Other Income on the 1099-MISC that was filed?

2. How do I go about adding rental income that was attributed to a digital (non-physical) property?

[JohnB5677]

I understand your confusion.  Although staking is considered passive income it is not posted to the rental section.

Staking will generate passive income. This is like getting interest in a
checking account.

With your return open, go to

1. Federal
2. Wages & Income
3. Less Common Income at the bottom
4. Select Miscellaneous Income, 1099-A, 1099-C
5. Select Other Reportable Income
6. Any Other Taxable Income?  = Yes
7. For Description = Income from Staking 

8. Enter the amount and = Continue

[notreadytohireanaccountant]

@JohnB5677 but in that case, how could I link the income to the original 1099-MISC? Do I ignore that form entirely and just manually input the income using the suggested approach? 

[JamesG1]

As a description you could enter Staking 1099MISC to tie it back to the form received.

Ultimately, you maintain a record in your paper file should the IRS or other taxing authorities have questions about what you reported.

[notreadytohireanaccountant]

Issue remains that this is treated as income and not Schedule E income, which would offset loses on a rental property. Is there any other approach for getting this listed on Schedule E?

[ErnieS0]

No. As esteemed Tax Expert @JohnB5677 said staking is not treated as passive income and does not go on Schedule E. There is no other approach for getting them listed there.

[DougSend2]

Everyone has a different idea on how to report staking income.  In my opinion reporting it as rental income is the best fit with the existing regulations.  

According to Notice 2014-21, virtual currencies are treated as property, and all general rules applicable to property are applicable to virtual currencies.

According to Reg § 1.61–8, gross income includes rentals received or accrued for the occupancy of real estate or the use of personal property.

Should be the end of it except for those 1099-MISC forms completed incorrectly.  I do say incorrectly because I'm not aware of any regulation that tells them to put it in Block 3, they just do it.

Please note:  I am not a tax expert, so do your own research or consult a tax expert.  The way I took care of this issue is I filled a Form 8275 disclosure statement with my return.  

Form 8275, Part 1:

First line block (a) of Form 8275 I listed "Notice 2014-21"; Block (c) I said "Cryptocurrency staking income is reported consistent with Notice 2014 and Reg § 1.61–8", Block (d) "Sch 1", Block (e) "8K", Block (f) the amount of staking income not reported in a 1099-MISC.

The next two lines I flagged the two 1099-MISC forms I got as being completed in error and not consistent with Notice 2014-21 and Reg § 1.61–8.

Block (a) if each "Reg § 1.61–8', Block(c) " 1099-MISC from *****(TIN*****) staking income incorrectly entered in Block 3 instead of Block 1", Block (d) "Sch 1", Block (e) "8K". Block (f) "USD amount in 1099-MISC"

Form 8275 Part II

Line 1, "According to Notice 2014-21, virtual currencies are treated as property, and all genral rules applicable to property are applicable to virtual currencies."

Line 2, "According to Reg § 1.61–8, gross income includes rentals received or accrued for the occupancy of real estate or the use of personal property."

Line 3, "Cryptocurrency staking involves the loaning of personal property to a blockchain node or other platform for their use in running the node or other platform.  Based on the language of Notice 2014-21 and Reg § 1.61–8, cryptocurrency staking clearly is the renting of personal property.  Therefore, such rental income needs to be entered as such on Schedule 1, Part 1, Line 8K."

Line 4, "For 2021, I received two 1099-MISC forms completed incorrectly.  One was from *****(TIN****) for $****** and the other was from ******(TIN******) for $*****.  Income was entered in Block 3 instead of Block 1 in the 1099-MISC and not consistent with Notice 2014-21 & Reg § 1.61–8."

Line 5, "In order to correct the errors on the two 1099-MISCs of line 4 above, I entered the amount of each 1099-MISC in TurboTax in 1099 Block 1 instead of Block 3.  This was necessary to properly characterize this staking income with my other staking income and make the reporting Income consistent with Notice 2014-21 and Reg § 1.61–8."

Line 6, "Total cryptocurrency staking rental income reported on Schedule 1, Line 8K is the sum of income earned without 1099-MISC issued plus the two 1099-MISCs received ($********+$*****+$***** = $******)."

So that is how I took care of the issue.  No guarantees it's the best approach.  But reporting as rental income does seem the best fit the limited existing guidelines.  Also, deductible expenses are handled a bit differently for different types of income.  So it could make a difference.  But in general, the tax comes out the same anyhow.  

I don't see any way the IRS could complain about reporting this way because it's their own words that are being used.  At least not unless/until there is a change in the law/regulations.  Their main concern is that the tax due is paid which is boing done.  

You might also fire off a letter to whoever sent you a 1099-MISC with the income in Block 3 and ask them to please start doing it according to existing regulations and place it in Block 1.  If enough people do this, maybe they will listen.  

[JohnB5677]

Staking will generate passive income. This is like getting interest in a checking account.
 

With your return open, go to

1. Federal
2. Wages & Income
3. Less Common Income
4. next to Miscellaneous Income, 1099-A, 1099-C
5. Select Other Reportable Income
6. Answer Yes on Any Other Taxable Income? Screen
7. Continue through the interview

[Critter-3]

Simply do NOT enter the 1099-misc in the 1099-misc section(so there is nothing to "link")   and ONLY enter it as other income for the Sch 1 line 8 ...

Follow these directions to post 1099-Misc, box 3 income not subject to self-employment taxes.

• Down the left side of the screen, click Federal.
• In the center of the screen, click Income & expenses.
• On the screen Your income and expenses, scroll all the way down to the last section, Less Common Income.
• Click the Start or Update button for the last topic, Miscellaneous Income, 1099-A, 1099-C.
• On the next screen, Let's Work on Any Miscellaneous Income, scroll down and click the Start or Update button for the last topic, Other reportable income.
• The next screen asks, Did you receive any other taxable income. Click Yes.
• On the next screen, Other Taxable Income, enter a description and the amount. Click Continue.
• On the next screen click Done.

The income will be reported on Schedule 1 line 8 with the description that you entered. 

[DougSend2]

One thing I forgot to be clear about.  Sch E is used for rental real estate, royalties, partnerships, S corporations, estates, trusts, and residual interests in real estate mortgage investment conduits (REMICs)..  Cryptocurrency is not real estate, it is personal property.  On Schedule 1, Part 1, Line 8K:  "Income from the rental of personal property if you engaged in the rental for profit but were not in the business of renting such property."    This is where you enter the income from staking if you wish to report it as rental income.....because it's personal property.  Schedule E does not apply.  

Or you could enter it in Line 8z and put "staking income" next to it.  I decided to report it as rental of personal property on Line 8K for the reasons I mentioned in my first post. 

[DougSend2]

One other thing I just thought of.  When I entered staking income as rental of personal property on Sch 1, TT did generate the form on Passive Loss caryovers even though mine was all zero.  So I'm now wondering if someone had rental real estate and rental personal property, if that income from rental personal property WOULD offset passive losses from rental real estate?  I have not yet looked closer at this because it does not apply to me at this time.  However, this could be important in your case because you give the impression that was your goal in wanting to put it on Schedule E.  In my case, I don't currently own rental real estate, so my tax comes out the same regardless.   If you enter your staking income as income from rental of personal property on Sch 1 and TT does offset that with any passive losses you might have on rental real estate, then that might be another reason to also file the Form 8275.  By going by the exact wording of the combination of Notice 2014-21 and Reg § 1.61–8, the IRS might not be in the best position to complain.  After all, that is basically exactly what they said to do.  But they still could complain about it.  If they do, the filing of Form 8275 could help prevent them from also being able charging penalties.  You put them on notice that was your position.