Decentralized finance, staking, and yield farming are all the new hallmarks of cryptocurrency. Ideas like these hold immense potential for granting investors a stake in blockchain technology growth.

However, it is important to remember the tax obligations from these earnings.

In this blog, we will consider the tax implications that crypto investors have to be on the lookout for. We shall go over the risks involved, the benefits accruable, and stipulations that guide yield farming, staking, DeFi, and crypto staking from the tax perspective.

Understanding these elements will empower potential investors to manage their earnings while staying within the law regarding taxes.

What Does "Staking" in Cryptocurrency Mean?

Crypto-staking is locking up part of their digital tokens on a blockchain network in return for rewards by a crypto investor.

Once an investor's stake is made within a cryptocurrency, he gets interest or other benefits. Moreover, he has a vote in proof-of-stake blockchains about contributing to the network's security and proving a transaction.

How Does Staking Work?

You can easily stake your tokens! But when? If you have proof of stake in cryptocurrency.

Staking means "locking up" your assets to help secure the blockchain network. You are rewarded with staking rewards for doing so and rendering help in network validation.

You can also join with a cryptocurrency wallet with staking.

Simple example: Suppose a blockchain network offers 5% as the reward for the staking period of one month. If you lock up 100 tokens, then after a month, you will get access to your 100 tokens and an extra five fiveokens as your reward.

How are Staking Returns Computed?

The Annual Percentage Rate determines the return from staking!!

Assuming you had staked 100 BTC on some validator offering a 10% APR, you would get interest of 10% per annum on the staked amount. Conversely, after one year, you will have 110 BTCs: 100 BTC + 10% from 100 BTC.

That would determine where you want to see your monthly earnings by dividing by 12: an annual interest rate. You will be banking around 0.833% in monthly interest at an APR of 10%.

What are the Taxations Concerning Staking Rewards/Income?

Staking rewards are taxed differently. They fall into the individual's tax slab, not this flat 30%.

Let us take the case of Mr. A, an employee. He has an aggregate taxable income of 20,00,000 GBP for the 2022-2023 assessment year. He has received staking rewards totaling 5 ETH worth 7,50,000 GBP. The exact amount would be taxed according to his slab rates and not at a flat rate of 30%.

If Mr. A sells 5 ETH for 10,00,000 GBP later, he must pay a 30% tax on the gains. Since he will have a gain of 2,50,000 GBP due to:

GBP 10,00,000 − GBP 7,50,000 = GBP 2,50,000

Thus, a tax of 30% will have to be paid.

Taxation Treatment for Cryptocurrency Transactions

If you hold cryptocurrency, you will have tax liabilities once you sell that asset. You only pay tax when selling the crypto and getting cash or units of another cryptocurrency. Then, you have "realized" your gains or losses, making it a taxable event.

Under proposed Section 6045 regulations, the statute clearly states that tax must be paid on digital asset gains. Losses can be deducted when these digital assets are sold.

Calculating those gains, however, is often complicated and expensive for many taxpayers.

Tax Implications of Staking Cryptocurrency

Staking rewards are subject to income tax as soon as they are received. The value of these rewards is their ordinary, or 'fair market value,' when you receive them. That means one needs to report its value in crypto reward U.S. dollars as ordinary income on your tax return.

If you want to do this correctly, keep detailed records of all rewards.

Many holders may need to realize that selling staking rewards is taxable. Should the cryptocurrency appreciate from the time it was received until it is sold, then capital gains tax will be owed on the difference between its original value and selling price.

The tax rate on this will depend on whether the gains are short-termed or long-termed, depending on how long the tokens were held before sold.

Typically, STCGs, or short-term capital gains, are taxed more severely than LTCGs, or long-term capital gains, which are applicable for an asset held for more than one year.

Receipt and sale of staking rewards may have different tax implications. The rules must be understood and followed to help manage your crypto tax obligations and stay within the IRS's radar.

To stay compliant with crypto rules, contact Crypto Accountants!

Cryptocurrency Staking and Tax Implications!