Staking involves buying tokens on a particular blockchain and keeping them for a fixed term. This process helps build the blockchain by adding new blocks. New tokens or rewards are created which can be exchanged for other cryptocurrencies, government-backed currency, or goods and services.
Crypto mining is another process used to add blocks to the blockchain. Crypto mining creates income equal to the value of the tokens received by miners from their activity and is taxable.
Miners use computers to solve complex mathematical puzzles, while staking relies on validating blocks without math. Staking uses less electrical power, less computing power, and requires no specialized knowledge.
Airdrops send free coins to existing coin owners, often as part of a promotion to increase awareness of a new cryptocurrency and are taxable.
The IRS has issued guidance on how crypto mining and airdrops should be treated. Although staking hasn't been specifically defined by the IRS, taxpayers should disclose their position on Form 8275 and keep documentation if the IRS questions the treatment the taxpayer has chosen.