Tax Court's Crypto Staker Ruling Doesn't Say Much About Staking

BLOOMBERG LAW ·

Last month, the US Tax Court released a memorandum decision in Paschall v. Commissioner . Although some have vastly overstated the holdings of the case, Paschall is both extremely narrow and nonprecedential. For one thing, Paschall is a pro se case. It was decided without a trial or expert testimony, on stipulated facts that fundamentally misstate how staking works. Included in the parties’ stipulated facts were that Paschall “received” certain staking rewards from the eToro platform. Read for what it actually decides, Paschall considers staking rewards that a taxpayer “receives.” On that rather narrow question, its conclusion is unremarkable. But it must be emphasized just how narrow this ruling is. The opinion doesn’t even consider whether a person has income in respect of digital assets they create via staking. The parties expressly stipulated that the petitioners didn’t create new tokens through staking. Thus, we note that the court’s analysis of the created property argument relies on stipulations that the taxpayer received the tokens, and that the taxpayer didn’t create the tokens. Practically speaking, the case ought to be limited to its stipulated facts. Paschall holds that staking via the eToro platform resulted in $33,354 of taxable income to the petitioners. Although the court didn’t explicitly rely on the reasoning of Rev. Rul. 2023-14 , it echoed that guidance’s (narrow) reasoning. In particular, the court applied the three-part Glenshaw Glass test to the stipulated facts, holding that: Paschall had complete dominion over the Cardano tokens received from eToro’s staking insofar as he could sell them for cash at will Paschall had an accession to wealth because “Mr. Paschall received staking rewards in the form of additional Cardano tokens credited to his eToro account” There was a clear realization because Paschall “received” staking rewards that increased his proportion of all outstanding Cardano tokens A taxpayer may “receive” tokens created via staking from a counterparty. A staker may pay those tokens to a third party as fees for assisting the taxpayer’s staking (with these fees able to be deducted by the payor). Or the staking rewards at issue may be, instead of newly created property, what are commonly referred to as transaction fees. These transaction fees are paid by those who wish to transact on a blockchain and are paid to the stakers who verify the underlying transactions. The payment of these fees (of which the staker is not the first owner), could be accurately be said to be received by stakers. This is distinct from the creation of new tokens by stakers (of which the staker is the first owner). Under Section 61 of the federal tax code, income must be derivedfrom a source outside the taxpayer. Merriam-Webster defines “income” as, almost circularly, involving a coming in. As the US Supreme Court in Eisner v. Macomber explained, income is what is “coming in, being ‘derived’ — that is, received or drawn by the recipient.” Section 61 is a broad provision, but not so broad as to require taxpayers to include amounts that don’t constitute income. A taxpayer who is the first owner of property “receives” nothing, because creating property and receiving income are distinct concepts. As the US Court of Appeals for the Second Circuit stated nearly a century ago, “Where the same organization makes and sells, the income is earned only upon the sale, and the prior increment flowing from manufacture is not income.” This is true even if a person hires another to make property. For example, if a person commissions a famous painter to paint a portrait of them, the person who commissions the work is the first owner of the finished painting — not the painter. The owner of the painting doesn’t derive income at the moment the painting is finished, however valuable it is. By limiting itself on its facts to cases where there is a “receipt” of tokens, Paschall begs the question — it assumes that there is income and concludes that there is income. It therefore produces a tautological result. As is always the case, a person who receives something of value from another person is likely to be liable for tax on the value of that property, absent an express exception under the tax code. What is most interesting here is what isn’t concluded: By its own reasoning, Paschall doesn’t address a case where a person is the first owner of tokens created via staking. This nonprecedential case must be limited to its stipulated facts — stipulations which are squarely inconsistent with the vast majority of staking — including staking through platforms like eToro. The case is Paschall v. Commissioner , T.C., No. 7382-24, decided 6/4/26. This article does not necessarily reflect the opinion of Bloomberg Industry Group Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners. Sean P. McElroy is a partner at Fenwick and advises clients on domestic and international tax planning and tax controversy matters, with particular focus on blockchain and cryptocurrency ecosystems. Matthew L. Dimon is an associate at Fenwick who concentrates his practice on domestic and international tax matters, including both tax planning and tax controversy. Interested in writing? Review our ⁠ author guidelines, and submit pitches to Insights@bloombergindustry.com. From research to software to news, find what you need to stay ahead. Log in to keep reading or access research tools and resources.

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The U.S. Tax Court issued a new ruling regarding cryptocurrency staking, but analysts note it failed to provide a clear conclusion on the overall taxation framework for staking. While this ruling did not cause an immediate regulatory shock to the market, it acts as a factor sustaining uncertainty regarding future digital asset taxation. Investors should focus on risk management while closely monitoring additional guidelines from the U.S. Congress and tax authorities.

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