On June 5, the U.S. Tax Court issued a memorandum opinion in a closely watched case about the taxation of rewards from staked cryptocurrency tokens. In Paschall v. Commissioner, T.C. Memo. 2026-46, the Tax Court held that these rewards are includable in gross income under Internal Revenue Code § 61 in the year of receipt.

Cryptocurrency staking rewards have become a frequent source of tax disputes because the Internal Revenue Code does not explicitly address how these rewards should be treated. Staking is a process used by certain blockchain networks that rely on proof-of-stake consensus mechanisms, under which token holders “lock” or delegate their tokens to support network validation activities in exchange for protocol-generated rewards. These rewards are typically distributed periodically in the same token and are often facilitated through intermediaries such as exchanges or custodial platforms, which aggregate user stakes and handle validation functions. This structure has led to ongoing debate over whether staking rewards are more appropriately characterized as compensation for services, akin to interest or dividends, or as newly created property not taxable until disposition.

Case Background and Result

In 2021, the taxpayer, Mr. Paschall, was issued a Form 1099-MISC reflecting income for staking rewards attributable to his holdings of Cardano tokens on the eToro platform. His staked tokens were deposited monthly throughout the year into an account with his other holdings. The platform delisted Cardano tokens in early 2022 and restricted Mr. Paschall’s ability to transfer the tokens to another platform until after 2021, though he was able to sell them at any time. Unfortunately, Mr. Paschall never received his 2021 1099-MISC from eToro and only became aware of it after receiving a notice of adjustment from the Internal Revenue Service (IRS) in 2023.

Mr. Paschall petitioned the adjustment to Tax Court and advanced three main arguments. First, the staking rewards were not includable in gross income as the tokens were not under the taxpayer’s “dominion and control” as established under prevailing case law of section 61 due to the trading restrictions placed by the trading platform. Second, the staking rewards should be characterized as either pro rata stock dividends (proportional distributions of additional shares to stakeholders) or self-made property and not includable in gross income until sale or disposition. Finally, the taxpayer argued that the IRS guidance on this topic in Rev. Ruling 2023-14 should be disregarded under the Supreme Court’s recent ruling in Loper Bright and that it could not apply retroactively for 2021.

The Tax Court determined that the staking rewards were under Mr. Paschall’s dominion and control upon receipt. Specifically, the Tax Court noted his ability to sell the tokens at any time. This fact doomed the taxpayer’s contention that the eToro restrictions on trading the token prevented his control over them for satisfaction of the dominion and control requirements of section 61. Further, the Tax Court determined that staking rewards are not analogous to pro rata stock dividends or self-made property. Finally, the Tax Court mooted the taxpayer’s argument on Rev. Rul. 2023-14. Though the Tax Court is not bound by the guidance issued by the IRS in Revenue Rulings, it did not need to address these arguments as neither the court’s opinion nor the IRS’s arguments rested on it.

Several aspects of the underlying litigation contributed to the Tax Court’s opinion. Mr. Paschall was pro se, and there was no trial. Further, the parties stipulated that Mr. Paschall did not create new tokens. Finally, there was no expert testimony as to the intricacies of the staking process. As a result, the Tax Court’s opinion rests upon a very specific set of facts which were averse to the taxpayer.

Future Considerations From Paschall

The Tax Court’s initial impression of staking via a non-precedential memorandum opinion is that taxpayers must include the amount attributable to rewards from staking of cryptocurrency tokens as gross income on their tax returns in the year the rewards are received. Areas of development for future cases appear to be the extent of the taxpayer’s dominion and control of staking rewards: the Tax Court specifically noted its analysis was limited by the lack of expert witness testimony on this point. Taxpayers should be wary of stipulating to crucial underlying facts and be prepared to put forth supporting expert testimony on the staking process in litigation. Taxpayers with staked tokens should carefully examine all platform restrictions which could distinguish their ownership of rewards from Mr. Paschall’s. Further, the court did not opine on the valuation of the rewards as the parties had stipulated to that fact. Taxpayers receiving a 1099-MISC for staking rewards could examine the underlying calculation by the brokerage to determine its correctness, though all guidance indicates fair market value will remain the standard, assuming the timing of the income for tax purposes does not change.

For taxpayers with cryptocurrency-related income, several open tax questions remain. Most fundamentally, Paschall does not address the characterization and timing of income related to token mining and staking. The IRS position on both of these activities is that mined cryptocurrency and tokens received for staking are taxed as ordinary income at fair market value on receipt and result in capital gains or losses upon subsequent sale of the token. Some commentators contend that mined cryptocurrency or staking rewards should be treated in the same manner as natural resources extracted from the ground, which are not taxed until sold or otherwise disposed of. Based on the Tax Court’s rejection of a similar analogy in Paschall, taxpayers with income from cryptocurrency mining should tread carefully if taking this position. In addition, Paschall does not address the issue of staking activity that gives rise to a trade or business, which would allow for deductions of all reasonable and necessary business expenses under Section 162.

For fintech platforms and exchanges offering staking programs, Paschall underscores the importance of clearly documenting when customers obtain the ability to sell or otherwise dispose of reward tokens, as that point will likely be treated as the time of income inclusion under Section 61. Platforms that intermediate staking may wish to review customer disclosures, 1099 reporting practices, and any restrictions on transfers or delistings to reduce ambiguity around customers’ dominion and control over rewards, as well as to align their practices with the IRS’s stated position in Rev. Rul. 2023-14. Although Paschall did not ultimately turn on Rev. Rul. 2023-14, it illustrates how, in a post–Loper Bright environment, courts may resolve digital asset tax issues squarely under Section 61 and traditional dominion-and-control principles, using IRS guidance as persuasive rather than binding authority.

For any issues at the intersection of cryptocurrency and tax, please contact the authors or any member of Taft’s FinTech group.