Are liquid staking rewards taxable?

Liquid staking lets users earn rewards while keeping assets liquid, but those rewards are typically taxed as income when received, similar to traditional staking.

Jul 20, 2025 at 03:35 pm

Understanding the Basics of Liquid Staking

Liquid staking is a mechanism that allows cryptocurrency holders to stake their assets while retaining liquidity. Traditional staking typically locks up funds for a set period, but liquid staking introduces liquid staking tokens (LSTs), which represent the staked assets and can be traded or used in decentralized finance (DeFi) protocols. Platforms like Lido Finance, Rocket Pool, and StakeWise offer such services. When users stake their ETH or other tokens through these platforms, they receive LSTs such as stETH or rETH, which can be utilized elsewhere in the DeFi ecosystem. This innovation has increased capital efficiency and participation in staking.

What Are the Tax Implications of Staking Rewards?

When users earn staking rewards through liquid staking, the question of taxation arises. In many jurisdictions, staking rewards are considered taxable income. The Internal Revenue Service (IRS) in the United States, for example, treats cryptocurrency as property, and any increase in holdings due to staking is treated as income at the time it is received. This means that liquid staking rewards are subject to income tax based on their fair market value in USD at the time of receipt. Additionally, when these rewards are later sold or exchanged, capital gains tax may apply based on the change in value from the time of receipt to the time of disposal.

How Liquid Staking Rewards Are Treated for Tax Purposes

The tax treatment of liquid staking rewards can vary depending on the specific mechanism used by the platform. In some cases, users receive LSTs that represent both their principal and accrued rewards. This raises a critical question: Are the additional tokens received through staking considered income or a return of capital? In the U.S., the IRS has not issued specific guidance on LSTs, but general tax principles suggest that any increase in token holdings resulting from staking is taxable. For instance, if a user deposits 10 ETH and receives 10 stETH, and later their balance increases to 10.2 stETH due to staking rewards, the 0.2 stETH is considered taxable income.

Record-Keeping and Reporting Requirements

Proper record-keeping is essential when dealing with liquid staking rewards for tax purposes. Users must track:

• The date and time when rewards were received
• The fair market value of the rewards in USD at the time of receipt
• The cost basis of the original staked assets
• Any subsequent transactions involving the rewards, such as selling, swapping, or reinvesting

Many crypto tax software tools like CoinTracking, Koinly, and Crypto.com Tax can help automate this process by integrating with wallets and exchanges. However, it is crucial to ensure that liquid staking transactions are correctly categorized, as some platforms may not clearly distinguish between principal and reward components in their transaction history.

International Tax Considerations for Liquid Staking

Tax laws regarding cryptocurrency staking vary significantly across countries. For example:

• In Canada, the Canada Revenue Agency (CRA) treats staking rewards as business income or investment income, depending on the nature of the activity.
• In the United Kingdom, Her Majesty's Revenue and Customs (HMRC) considers staking rewards as taxable under income tax rules, with capital gains tax applying upon disposal.
• In Australia, the Australian Taxation Office (ATO) treats staking rewards as ordinary income, valued at the time of receipt.

Users should consult a local tax professional to understand how liquid staking rewards are treated in their jurisdiction and whether specific reporting obligations apply.

Common FAQs About Liquid Staking and Taxes

Q: Are liquid staking tokens like stETH considered taxable assets?

Yes, liquid staking tokens are generally considered taxable assets. Their value can fluctuate, and any disposal—such as selling, swapping, or using them in DeFi—may trigger capital gains or losses.

Q: Do I have to pay taxes if I don’t withdraw my staking rewards?

In most jurisdictions, staking rewards are taxable at the time they are received, regardless of whether they are withdrawn or remain in the staking contract. The receipt of additional tokens constitutes a taxable event.

Q: How do I report liquid staking rewards on my tax return?

You should report staking rewards as income on your tax return, using the fair market value in USD at the time of receipt. Platforms may provide tax statements or transaction history, but users are responsible for accurate reporting.

Q: Is there a difference between traditional staking and liquid staking for tax purposes?

While the mechanism differs, the tax treatment is generally the same. Both types of staking result in an increase in holdings, which is considered taxable income upon receipt.