The Internal Revenue Service (IRS) is facing growing backlash over its tax treatment of cryptocurrency staking rewards, with industry groups, lawmakers, and market participants calling for reforms to rules that critics say are unfair, overly burdensome, and a drag on innovation.
The IRS now has to deal with both old and new laws that add more pressure on the agency to devise clever and fairer tax rules for staking.
Senator Young asks the IRS to change the way it taxes the rewards people get for staking cryptocurrency
Senator Todd Young sent a letter to the Treasury Secretary and Acting IRS Commissioner Scott Bessent. He wants them to revise the 2023 rule that taxes staking rewards because the system forces users to pay taxes on unrealized gains. He also stated that the current rules make it more difficult for lawmakers to determine the amount of money they will receive from future laws on digital assets.
Staking rewards are unstable because their value fluctuates rapidly, and converting them into cash isn’t always straightforward. So if someone has to pay taxes on rewards before they sell them, it would be like paying taxes on money that only exists on paper. People spoke up and said the IRS should change the rules so that users pay taxes only when they sell or exchange their staking rewards.
The pressure on the IRS is intensifying now because the agency has allowed large crypto trusts and ETFs to stake digital assets without forfeiting their special tax status. This new rule (Revenue Procedure 2025-31) does not specify whether regular crypto users must follow suit, so people want the IRS to develop clearer and fairer laws on the issue.
The Trump administration released a report on digital assets in July 2025, requesting that the IRS clarify and simplify the rules to prevent confusion and unexpected bills for taxpayers.
The IRS now allows crypto trusts to lock up digital coins for staking without losing their tax status
The IRS released the Revenue Procedure 2025-31 rule on November 10, 2025, to allow publicly traded trusts and ETFs to stake safely, earn rewards, and share those rewards with investors without risking their tax status. The rules are clear, and they encourage more investment in digital assets because the targeted organizations can now get extra income legally.
However, even with these favorable conditions, the trusts must adhere to numerous detailed rules to qualify for the safe harbor. Firstly, their shares must be traded on a national securities exchange, which allows investors easy access and increases transparency.
Secondly, the trust can only hold cash and a single digital asset; however, a qualified custodian should be responsible for holding all assets and controlling the addresses. Next, the trust must obtain immunity from “slashing” penalties to ensure that investors do not lose money unfairly, simply because the blockchain network decides to punish validators for mistakes or being offline.
To prevent the trust from changing its investment strategy and affecting the fund’s structure, the new rule requires trusts to receive their staking rewards in the form of the digital asset they already hold. Finally, the IRS allows trusts to modify their documents to authorize staking at any time within nine months of the guidance release, provided they follow all other applicable rules, without affecting their tax classification.
Treasury Secretary and Acting IRS Commissioner Scott Bessent stated that the rules benefit everyday investors because ETFs and other publicly traded trusts can invest in assets and share the rewards with retail investors. He also said the guidance provides clear rules for new institutional investors to participate in staking within the country, rather than pushing them to offshore platforms.
The only remaining issue is that regular crypto holders are still taxed on any staking rewards they haven’t even sold yet, and experts say it’s very unfair because large ETFS and funds enjoy more favorable rules.
The Revenue Procedure 2025-31 encourages more institutional investors to enter the staking markets and increase returns for their investors. Still, it also discourages everyday crypto users from taking part in the same activities due to uncertainty. Everyone is now waiting to see if the IRS will issue new guidance for small investors or if Congress will step in to ensure that individual investors and small validators receive fair treatment.
If you're reading this, you’re already ahead. Stay there with our newsletter.
