Crypto Staking Explained: How It Works, the Risks and How the IRS Taxes Rewards

What Is Staking?

Proof-of-stake networks use staked coins, instead of mining machines, to decide who adds the next block. Validators lock up coins as a security deposit and earn rewards for doing the job honestly. Ethereum moved to proof of stake in September 2022, and ethereum.org explains the options, from running your own validator with 32 ETH to pooled and exchange staking.

Who is it for? Long-term holders of a proof-of-stake coin who already plan to keep it, and who understand that rewards do not protect them from price falls.

Watch: Ben Simpson Explains

Ben Simpson explains how he thinks about staking and other ways to earn income on crypto, and the risks he checks first.

Three Ways to Stake

Liquid staking and restaking add more layers, such as tokens that represent your staked coins. Each layer adds smart contract and platform risk.

The Risks to Understand First

• Price risk: rewards are paid in the same coin, so a 50% fall in price wipes out years of rewards
• Lock-up and exit queues: some networks make you wait to withdraw
• Slashing: validators can lose part of their stake for serious faults
• Platform risk: a custodian or smart contract can fail, as several lending platforms did in 2022
• Rule changes: tax and regulatory treatment can change

In a short video on earning income on crypto, Ben Simpson’s point is simple: the yield is the smaller decision. The bigger one is whether you want to hold that coin at all.

How the IRS Taxes Staking Rewards

In Revenue Ruling 2023-14, the IRS said that a cash-method taxpayer who receives staking rewards must include their fair market value in gross income in the year they gain dominion and control over them. That value then becomes your cost basis. When you later sell, swap or spend those coins, you can have a capital gain or loss, and coins held for more than one year generally qualify for long-term capital gains rates.

Keep records of each reward: the date, the amount and its value in US dollars when received. From the 2025 tax year, brokers report sales on Form 1099-DA. Our US crypto tax guide covers the forms. A licensed US tax professional can confirm how this applies to you.

What the SEC Staff Has Said

On May 29, 2025, the SEC’s Division of Corporation Finance published a statement on certain protocol staking activities. Its view is that solo staking, staking directly with a third party and certain custodial arrangements on public proof-of-stake networks do not involve the offer and sale of securities. It is a staff statement, not a rule, and it does not cover every type of staking, such as liquid staking or restaking.

Staking Rewards Are Not the Same as Profit

Staking rewards are often shown as a yearly percentage, but that number is not your real return. On many networks, part of every reward is newly created coins. If the total supply grows at a similar rate to your rewards, staking mostly keeps your share of the network the same, rather than adding to it. Holders who do not stake are the ones being diluted.

Fees matter too. Exchanges and staking services usually keep a share of the rewards, and liquid staking tokens can trade below the value of the coins they represent during a sell-off. Before you stake, compare the advertised rate with the network’s supply growth and the provider’s cut. The gap between them is closer to what you actually earn, before tax and before any change in price.

Then remember the tax point above: in the US, each reward is income when you receive it, even if you never sell and the price later falls.

Should Staking Be Part of Your Plan?

Staking can make sense for coins you already plan to hold for years, after you have checked the risks above. It should not be the reason to buy a coin. Start with your position sizes, then decide whether staking a part of a position is worth the extra platform and lock-up risk.

Security Lessons From Our Live Cohorts

In our week three cohort session on wallet security, the team’s checklist is short. Buy a hardware wallet brand new and direct from the maker’s own store. Treat your recovery phrase, also called a seed phrase, as the master key: keep it on paper or another analog format and never type it into a website. Do not act on urgent emails or messages that ask for it.

In October 2026, Director of Research Matt Willemsen wrote up a tampering incident involving hardware wallets sold through an unofficial reseller. His point was that a device bought straight from the maker avoids that risk entirely, and that anyone who bought second hand or from a discount seller should move funds to a new recovery phrase on a device bought direct.

Staking in the SHIFT Method

In the 5-step SHIFT Method, staking is a choice you make after Step F: Filter Every Coin Before You Buy. The filter covers token unlocks, dilution and liquidity, which matter even more when rewards add new supply. That is a teaching framework, not a recommendation for your situation.