Senator Young urges rethink of IRS rules on crypto staking rewards
U.S. Senator Todd Young of Indiana is pressuring the Treasury Department and the Internal Revenue Service to revisit how the federal government taxes cryptocurrency staking rewards, arguing that current guidance could be unfair, confusing, and economically distortive.
In a letter to Treasury Secretary Scott Bessent, who is also serving as acting IRS commissioner, Young called for a review of the 2023 Biden-era guidelines that determine when and how staking rewards are subject to income tax. Staking, a core feature of many proof-of-stake blockchains, allows users to lock up their digital assets to help validate transactions and secure the network, in return for periodic rewards paid in crypto.
Under the existing IRS position, those rewards are treated as ordinary income at the moment they are received, based on the fair market value of the tokens at that time. Only later, when the tokens are sold, are any additional gains or losses recognized for capital gains tax purposes. Critics say this framework effectively taxes “unrealized gains” because the tokens may not have been sold, may be illiquid, or may fall sharply in value before the owner can convert them to fiat currency.
Young, who sits on the Senate Finance Committee, argued that this tax timing rule not only creates uncertainty for taxpayers but also complicates revenue projections for any future legislation touching the digital asset sector. If the value of a token swings wildly between the time a reward is received and when it is sold, both taxpayers and the government are left dealing with unpredictable outcomes and a complex compliance burden.
Digital asset advocates have been pushing for an alternative approach that would tax staking rewards only when the assets are sold or exchanged, similar to how unrealized appreciation in many other assets is not taxed until a realization event occurs. They contend that treating staking more like a production or creation process, rather than immediate income, would be more consistent and would avoid punishing long-term network participants who are not actively trading.
The debate comes at a moment when the IRS is attempting a broader overhaul of how it monitors and reports cryptocurrency-related activity. In a recent step, the agency sent a proposal to the White House outlining how the United States could implement the Crypto-Asset Reporting Framework, or CARF, a new global standard for tax transparency in digital assets.
CARF, developed by the Organisation for Economic Co-operation and Development in 2022, is designed to enable governments to exchange information about crypto holdings across borders, in order to curb offshore tax evasion. Under the IRS proposal, the U.S. would join a system already being embraced by dozens of other countries, and would require U.S. taxpayers to report more detailed information on capital gains from foreign crypto platforms and custodians.
The plan envisions bringing the United States into alignment with at least 72 other jurisdictions by 2028. Rollout of CARF is expected to begin in 2027, and about 50 countries — including major economies such as Japan, Germany, and the United Kingdom — have signaled that they are ready to adopt the standard. For U.S. taxpayers who use overseas exchanges or custody services, this could mean far more robust reporting and fewer opportunities to obscure crypto holdings from tax authorities.
At the same time, the IRS is under pressure from both industry and lawmakers to modernize its treatment of specific segments of crypto activity, including decentralized finance and staking. Recent moves to roll back or revise earlier DeFi-related guidance have fueled expectations that staking rules could also be revisited. Young’s intervention adds political weight to those expectations, especially given his influential role on the Finance Committee.
The core policy dilemma centers on how to classify staking rewards in tax law. Supporters of the current approach say that when a taxpayer receives additional tokens as a reward, that is analogous to earning interest or rental income and should be taxed when received. Opponents counter that staking often resembles a form of network participation or digital “production,” more akin to growing a crop or mining a commodity, which traditionally is not taxed until the asset is sold.
In practice, the current rules can create significant compliance headaches. Staking rewards may be distributed many times per day, and keeping precise records of the value at the exact moment each micro-reward is received can be extremely complex, especially for individual retail participants. If those tokens later decline sharply in price, taxpayers may owe income tax on value that has evaporated, and they might not have enough liquid assets to pay the bill.
For policymakers, the stakes go beyond individual fairness questions. The way staking is taxed may influence whether innovators and validators choose to operate in the United States or move activity overseas. A regime seen as overly punitive or administratively burdensome could push staking providers and capital to more crypto-friendly jurisdictions, undermining U.S. competitiveness in a rapidly developing global market.
The push to harmonize international reporting through CARF reflects another layer of concern: that crypto could become a tool for large-scale tax evasion if it remains outside traditional transparency frameworks. By requiring platforms to share information about account holders and transactions, CARF aims to give tax authorities a clearer line of sight into cross-border digital asset flows, similar to how existing standards work for traditional bank accounts and securities.
For everyday crypto users, these parallel developments — the potential rethinking of staking taxation and the adoption of CARF — could significantly change how they interact with digital assets. Investors may need to adjust their strategies, keep more meticulous records, and possibly work with tax professionals who specialize in digital assets. The distinction between domestic and foreign platforms will also become more important as reporting rules tighten.
Market participants are watching closely to see whether the IRS and Treasury will be willing to soften or clarify the 2023 guidance on staking. Some legal experts argue that more nuanced rules could differentiate between types of staking activities, reward structures, and business models. For example, professional validators could be treated differently from casual retail users, or certain long-term, protocol-level activities could receive more favorable treatment.
Another open question is whether Congress will ultimately step in with legislation that codifies a specific tax approach to staking and other forms of on-chain income. While the IRS can issue guidance and regulations, only Congress can definitively rewrite the tax code, and the growing economic significance of digital assets makes it more likely that lawmakers will eventually seek comprehensive rules rather than piecemeal fixes.
In the near term, the clash over staking rewards highlights the broader challenge of fitting new, decentralized technologies into regulatory systems designed for centralized intermediaries. As networks evolve and new forms of on-chain activity emerge — from restaking and liquid staking derivatives to complex DeFi strategies — the pressure on regulators to offer clear, workable frameworks will only increase.
For now, Senator Young’s appeal to Secretary Bessent underscores that the taxation of staking rewards is no longer a niche technical issue. It has become a test case for how the U.S. intends to balance tax enforcement, innovation, international coordination, and taxpayer rights in the digital asset era. Whether the IRS chooses to maintain, refine, or fundamentally change its current stance will send a strong signal about the future direction of crypto policy in Washington.