If you stake cryptocurrency, the rewards you earn are not some tax-free bonus you can worry about later. A 2026 U.S. Tax Court decision has reinforced a rule that catches many investors by surprise: staking rewards are taxable income in the year you receive them — measured at their fair market value on the day they land in your account, not when you eventually sell.
This is general information, not individual tax advice — the right treatment depends on your specific situation.
What the Tax Court Decided
In Paschall v. Commissioner, a taxpayer held cardano tokens in an account on a digital asset platform that automatically staked them and paid monthly rewards in additional tokens. The court held that those reward tokens were gross income under Section 61 of the tax code in the year he received them. The reasoning traces back to a long-standing Supreme Court principle (Helvering v. Horst): once you have "dominion and control" over income — the power to use or dispose of it — it is taxable, full stop.
"But My Tokens Were Locked"
The taxpayer argued he did not really control the rewards because, for part of the year, the platform restricted his ability to transfer the tokens to another wallet. The court was not persuaded. He could still have converted the tokens to cash at any time, and that ability to dispose of their value was enough. The lesson: a temporary transfer restriction does not push the income into a later year. If you could cash it out, you are taxed on it.
How Much Income — and What Happens Later
The amount of income is the fair market value of the tokens at the moment you receive each reward. That value also becomes your cost basis. When you later sell or swap those tokens, you calculate a capital gain or loss on the difference between the sale price and that basis. In other words, staking rewards are taxed twice over their life — once as ordinary income when received, and again (on any appreciation) as a capital gain when sold. Tracking the receipt-date value is what keeps you from overpaying on the second step.
The Mistakes We See Most
Three errors are common. First, assuming rewards are not taxable until you sell — they are taxable at receipt. Second, keeping no records, so there is no defensible basis when the tokens are sold. Third, ignoring the income because the exchange did not issue a 1099. A missing tax form does not make income disappear; the obligation to report is yours. With new digital-asset reporting rules phasing in, the IRS is receiving more of this data than ever.
The VarStan Take
Crypto is one of the easiest ways for an otherwise careful business owner to end up with an underreporting problem. The fix is unglamorous but effective: record the date, token amount, and U.S. dollar value of every reward as you receive it, and keep that log with your tax records. We help clients build a clean basis trail, report staking and other digital-asset income correctly, and plan sales to manage the capital-gains side. If you have been staking without tracking, it is worth a conversation before filing season.
Related reading: Business Meals & Travel: What You Can Actually Deduct and The QBI Deduction: How the 20% Pass-Through Break Works.