Are crypto staking rewards taxable?

Yes. Under Revenue Ruling 2023-14, staking rewards are taxable as ordinary income when you obtain dominion and control. The fair market value at receipt becomes your cost basis.

Is wrapping crypto (ETH to wETH) taxable?

Uncertain—the IRS has not provided specific guidance. The conservative position treats wrapping as a taxable exchange. Notice 2024-57 provides broker reporting relief but is not substantive tax guidance.

DeFi Taxes Explained: How the IRS Treats Staking, Liquidity Pools, Wrapping, and Other DeFi Transactions

Q: Are DeFi transactions taxable?

Most are. Token swaps are taxable exchanges, staking rewards are ordinary income when you have dominion and control. DeFi protocols don't issue 1099-DA after the broker rule repeal, but taxability is unchanged.

Q: What is the status of the Jarrett staking case?

The Jarretts sued challenging Rev. Rul. 2023-14, arguing staking creates new property taxable only upon sale. Rev. Rul. 2023-14 remains in effect while litigation proceeds.

Q: Are DeFi platforms required to report to the IRS?

No, after the Congressional Review Act repeal. Custodial exchanges still report via Form 1099-DA, but non-custodial DeFi protocols do not. Taxpayers must self-report.

Quick Answer

After the DeFi broker rule repeal, non-custodial protocols don't issue Form 1099-DA—but transactions remain fully taxable. Staking rewards are ordinary income when you have dominion and control (Rev. Rul. 2023-14). Liquidity pools, wrapping, and bridging lack direct IRS guidance—use reasonable, documented positions. Software often misclassifies DeFi transactions; manual review is essential.

Key Points

DeFi platforms are not subject to Form 1099-DA reporting after the Congressional Review Act repeal—but taxpayers must still report DeFi transactions.
Staking rewards are taxable as ordinary income when dominion and control is obtained (Rev. Rul. 2023-14).
The Jarrett case challenging staking taxation is active in litigation—but Rev. Rul. 2023-14 remains in full effect.
Liquidity pools, wrapping, and bridging lack direct IRS guidance and require reasonable, documented positions.
Notice 2024-57 provides broker reporting relief for certain DeFi transactions—but does not change taxpayer obligations.
Software frequently misclassifies DeFi transactions without manual review.

DeFi Broker Rule Repeal

The Congressional Review Act repealed the DeFi broker reporting expansion (H.J.Res.25). This was the first cryptocurrency bill and first tax-related CRA disapproval resolution ever signed into law.

What was repealed:

The rule that would have required DeFi "trading front-end service providers" to file Form 1099-DA

What remains in effect:

Custodial exchanges → Still subject to Form 1099-DA reporting under T.D. 10000
DeFi protocols / non-custodial platforms → Not required to report gross proceeds
Taxability of DeFi transactions → Completely unchanged

Critical point: Lack of broker reporting does not mean DeFi activity is non-taxable. You must self-report all taxable DeFi transactions. The IRS knows that 1099s are missing from this sector and may increase audit scrutiny on taxpayers with large unexplained wallet transfers.

How the IRS Analyzes DeFi Transactions

The IRS does not tax "protocols." It taxes economic events. For any DeFi transaction, the analysis focuses on:

Was property disposed of?
Was new property received?
Was income realized?
Did the taxpayer obtain dominion and control?

Labels like "deposit," "stake," or "wrap" are not controlling—what matters is the economic substance of what occurred.

DeFi Tax Treatment: Certainty Spectrum

Staking Rewards (Clear Guidance) — The Jarrett Case

Revenue Ruling 2023-14 establishes that staking rewards are taxable as ordinary income when the taxpayer obtains dominion and control (the ability to sell, exchange, or transfer).

Key points:

Taxable upon receipt, not upon later sale
Income equals fair market value at time dominion and control is obtained
FMV at receipt becomes your cost basis for later disposition
Applies to both direct staking and staking through exchanges

The Jarrett Case: The Fight for "Realization"

The taxation of staking rewards remains one of the most contentious areas of digital asset law. The Jarrett v. United States case challenges Rev. Rul. 2023-14.

The Argument: Staking rewards are "created property" (like a baker baking bread or a farmer growing crops). They should not be taxed until they are sold or exchanged (realization), citing constitutional requirements.

Current Status: The case is active in litigation. While there is no ruling yet, the existence of the suit provides a "reasonable basis" for taxpayers who wish to take a position contrary to the IRS.

Monaco CPA Stance: While we support the Jarretts' legal theory, the current law of the land is Rev. Rul. 2023-14. We recommend reporting staking rewards as income to avoid penalties. If the Jarretts ultimately prevail, we can file protective refund claims for affected clients later.

For aggressive positions: Taxpayers taking the "created property" position contrary to Rev. Rul. 2023-14 should file Form 8275 (Disclosure Statement) to avoid accuracy-related penalties if challenged.

Mining and Validator Rewards (Clear Guidance)

Mining and validator rewards are:

Ordinary income when received (same as staking)
Potentially subject to self-employment tax if activity rises to a trade or business
Cost basis equals FMV at receipt for later sale

Airdrops (Clear Guidance)

Revenue Ruling 2019-24 governs airdrops:

Ordinary income when dominion and control is obtained
FMV at time of control determines income amount
If FMV is truly $0 at receipt, no income (but document this)
Governance tokens received via airdrop follow the same treatment

DeFi Activities With No Direct IRS Guidance

These areas require reasonable, consistently applied positions based on tax principles.

The Tax Treatment of "Wrapped" Tokens

DeFi users often "wrap" tokens (e.g., BTC → wBTC) to use them on different blockchains. The IRS has not provided specific guidance.

Conservative position (recommended):

Treat wrapping as a taxable disposition of property under IRC § 1001
Since wBTC is a distinct asset on a different blockchain with different smart contract risks, it is not "like-kind"
IRC § 1031 (like-kind exchanges) does not apply to crypto
Recognize gain/loss based on FMV of wrapped token received vs. cost basis of original token

Aggressive position:

Treat wrapping as a non-recognition event (like a stock split)
The economic value is unchanged, and unwrapping reverses the process 1:1
Wrapping is merely a custodial receipt—you deposit BTC and get a "claim check" (wBTC)

The Risk: If you bought BTC at $10,000 and wrap it into wBTC when Bitcoin is $90,000, a strict interpretation says you just realized an $80,000 capital gain.

The Planning: Until the IRS issues specific guidance exempting bridging/wrapping, the safest route is to treat these as taxable events. This effectively "steps up" your basis in the new wBTC, reducing your tax burden when you eventually sell it for cash.

Notice 2024-57 context: The IRS provided broker reporting relief for wrapping/unwrapping, but explicitly stated this "does not constitute or reflect a substantive analysis for Federal income tax purposes." The reporting exemption is not tax guidance.

Liquidity Pool Deposits and Withdrawals

The uncertainty: When you deposit ETH + USDC into a liquidity pool and receive LP tokens, is this a taxable exchange?

Conservative position: Treat as a taxable disposition of the deposited assets. Recognize gain/loss based on FMV of LP tokens received vs. cost basis of assets deposited.

Aggressive position: Treat as a non-taxable deposit similar to securities lending. Only taxable upon withdrawal if different assets returned.

Recommendation: Document your position and apply consistently. The conservative approach reduces audit risk.

Impermanent Loss

Impermanent loss is an economic concept, not a tax term. You generally cannot claim a tax loss for impermanent loss while assets remain in the pool. Losses are only recognized when you withdraw and actually receive fewer assets (in dollar terms) than you deposited.

Bridging Cross-Chain

Bridging assets between blockchains (e.g., ETH on Ethereum to ETH on Arbitrum) varies by mechanism:

Lock and mint: Original asset locked, synthetic issued → possibly taxable
Burn and mint: Original destroyed, new created → likely taxable
Liquidity pool bridges: Swap mechanism → likely taxable

Document your position based on the specific bridge mechanism used.

Lending and Borrowing

Depositing collateral: Generally not taxable if you retain ownership and can reclaim the same assets.

Receiving loan proceeds: Not taxable income (loans are not income).

Interest payments (to lenders): Ordinary income when received.

Liquidation: Taxable disposition of collateral. Recognize gain/loss based on FMV at liquidation vs. cost basis.

Notice 2024-57: Broker Reporting Relief

Notice 2024-57 provides temporary broker reporting relief for:

Wrapping / unwrapping transactions
Liquidity pool transactions
Staking transactions
Lending transactions
Short sales
Notional principal contract transactions

Critical distinction:

Reporting relief applies to brokers
Taxpayers must still report transactions correctly

Even if brokers aren't required to report these DeFi transactions, you are responsible for accurate reporting on Form 8949, Schedule D, Schedule C (if business income), and Schedule 1.

Why DeFi Tax Software Often Fails

DeFi software frequently:

Treats transfers as sales (creating phantom gains)
Mislabels LP deposits as dispositions
Misclassifies wrapped tokens as taxable swaps
Duplicates income across platforms
Misses multi-step transactions (e.g., flash loans)
Fails at cross-chain cost basis tracking

Software output should be reviewed—not blindly accepted. For complex DeFi activity, manual classification is often required.

Defensible DeFi Reporting: What Actually Matters

In practice, IRS defensibility depends on:

Reasonable interpretation: Your position aligns with tax principles even without specific guidance
Consistent application: You treat similar transactions the same way
Clear documentation: You can explain and support your approach
Reconciliation of balances: Your reported gains/losses tie to actual holdings
Disclosure where appropriate: For uncertain positions, consider Form 8275

The IRS evaluates reasonableness, not perfection.

Record Keeping and Tax Planning

For DeFi activity, maintain records of:

Every transaction with timestamp, amounts, and wallet addresses
Protocol interactions (deposits, withdrawals, claims)
Reward distributions with FMV at receipt
Gas fees paid (add to cost basis or selling expenses)
Your classification methodology for grey-area transactions

Tax planning opportunities:

Tax-loss harvesting: Realize losses to offset gains (check current wash sale rules for crypto)
Long-term holding: Assets held over one year qualify for lower capital gains rates
Timing of reward claims: If you control when to claim staking rewards, timing affects which tax year the income falls in

When Professional Review Is Appropriate

Professional review is commonly appropriate if:

You used liquidity pools with significant value
You staked or restaked assets across protocols
You wrapped, bridged, or moved assets cross-chain
Software reports show conflicting results
You anticipate IRS scrutiny due to transaction volume or gains
You're unsure how to classify specific DeFi transactions
You want to take a position contrary to Rev. Rul. 2023-14 on staking

Schedule a Consultation

DeFi transactions often require manual classification and documentation. Schedule a consultation to determine whether your DeFi reporting approach is reasonable and defensible.

Frequently Asked Questions

Are DeFi transactions taxable?

Most are. Classification depends on the specific facts—swaps are taxable exchanges, rewards are income, deposits may or may not be taxable depending on the mechanism.

Are DeFi platforms required to report to the IRS?

No, after the Congressional Review Act repeal. But taxpayers must still self-report all taxable DeFi transactions.

Can I rely entirely on software for DeFi taxes?

Not for complex activity. Software frequently misclassifies DeFi transactions and requires manual review.

Will the IRS audit DeFi users?

The IRS focuses on mismatches, material errors, and large unreported gains—not protocol choice. Accurate, consistent reporting reduces risk.

Is wrapping crypto taxable?

Uncertain. The conservative position treats it as a taxable exchange. The aggressive position treats it as non-recognition. Document your chosen approach, and consider Form 8275 disclosure for aggressive positions.

What is the status of the Jarrett staking case?

The Jarrett lawsuit is pending. Until there's a court ruling, Rev. Rul. 2023-14 remains in effect—treat staking rewards as taxable income upon receipt.

Can I take a position that staking rewards aren't taxable?

You can, but it carries risk. The Jarrett case provides a "reasonable basis," but Rev. Rul. 2023-14 is still the law. If you take this position, file Form 8275 to disclose it and potentially avoid accuracy-related penalties if challenged.

The Bigger Picture

DeFi taxation is not about loopholes. It's about reasonable classification in an evolving regulatory environment.

Taxpayers who document their approach and apply it consistently are far better positioned than those who rely on unchecked automation or hope the IRS won't notice.

Next Steps

DeFi expands opportunity—but it also expands tax complexity. Understanding where IRS guidance is clear (staking, airdrops) and where judgment is required (LPs, wrapping) is essential for accurate compliance.

If your DeFi activity is material or unclear, reviewing it before filing can prevent years of downstream issues. The cost of proactive review is far less than defending an uncertain position after the fact.

About the Author

Greg Monaco, CPA is a New Jersey-licensed CPA and the founder of Monaco CPA. He focuses on cryptocurrency taxation, DeFi reconciliation, and complex digital asset reporting for clients nationwide.