How to report liquid staking income on taxes

Liquid staking lets users earn rewards while retaining liquidity, but the IRS treats received tokens like stETH as taxable income based on their value at receipt.

Jul 22, 2025 at 05:07 am

Understanding Liquid Staking and Its Tax Implications

Liquid staking allows cryptocurrency holders to stake their assets while maintaining liquidity by receiving a tokenized representation of their staked assets. Platforms like Lido Finance, Rocket Pool, and others enable users to participate in proof-of-stake networks without locking up their tokens. This innovation introduces unique tax challenges, particularly when it comes to reporting staking rewards and the receipt of derivative tokens like stETH or rETH.

The Internal Revenue Service (IRS) has not issued specific guidance on liquid staking, but existing cryptocurrency tax frameworks suggest that these activities may be treated as taxable events. The receipt of staking rewards or liquid staking tokens could trigger income tax obligations, and users must carefully track the fair market value of such tokens at the time of receipt.

How to Determine Taxable Income from Liquid Staking Rewards

When you earn staking rewards through a liquid staking platform, you generally receive derivative tokens that represent your staked assets plus any accrued yield. These tokens can appreciate or depreciate in value relative to the original asset. For tax purposes, the fair market value of the derivative token at the time it is received is considered taxable income.

For example, if you deposit ETH into a liquid staking protocol and receive stETH in return, the value of the stETH in USD at the moment of receipt is your taxable income. If you later receive additional stETH as staking rewards, each reward distribution must be valued separately and reported as income.

Tracking Cost Basis and Capital Gains on Liquid Staking Tokens

When you eventually sell or exchange your liquid staking tokens, you must calculate any capital gain or loss based on the difference between your cost basis and the sale price. Your cost basis includes the original value of the token when you received it plus any additional rewards you have claimed.

• Determine the acquisition date and fair market value of each staking reward token
• Keep a running total of your cost basis as you receive more tokens
• Record the sale price and date whenever you dispose of the tokens

Failure to maintain accurate records can lead to underreporting or overreporting of income and capital gains. Use of crypto tax software or spreadsheets is highly recommended to track these events.

Reporting Liquid Staking Income on IRS Forms

To report income from liquid staking, you must include it on your Form 1040 Schedule 1 as “Other Income”. Additionally, if you sell or exchange your liquid staking tokens, you must report those transactions on Form 8949 and Schedule D.

• List each taxable event involving liquid staking tokens
• Include the date of receipt, the fair market value at that time, and the type of token
• For disposals, report the sale date, proceeds, cost basis, and resulting gain or loss

It is crucial to retain documentation such as wallet transaction records, exchange statements, and screen captures of token values at receipt time. These records help substantiate your tax filings in case of an audit.

Common Mistakes to Avoid When Reporting Liquid Staking Income

Many taxpayers overlook the tax implications of liquid staking due to the complexity of derivative tokens and fluctuating values. One of the most common errors is failing to report the receipt of staking reward tokens as income. Another frequent mistake is misidentifying the cost basis of these tokens when they are sold or traded.

• Not valuing each token at the exact time of receipt
• Combining multiple token receipts into a single entry without proper breakdown
• Ignoring small or fractional token rewards that still carry tax implications

To avoid these pitfalls, maintain detailed logs and consider using a crypto tax platform that supports liquid staking tracking. Always consult a tax professional familiar with cryptocurrency regulations to ensure compliance.

FAQ: Frequently Asked Questions About Liquid Staking Taxes

1. Are liquid staking tokens like stETH or rETH considered income when received?

Yes, according to current IRS guidelines, the receipt of derivative tokens from liquid staking platforms is generally treated as taxable income based on their fair market value at the time of receipt.

2. Do I pay taxes on the appreciation of staking tokens like stETH?

Appreciation in the value of staking tokens is not taxed until you sell or exchange them. At that point, any gain is subject to capital gains tax based on how long you held the tokens.

3. Can I deduct losses from selling staking tokens?

Yes, if the value of your staking tokens has decreased when you sell them, you can report the loss on your taxes and potentially offset other capital gains or up to $3,000 of ordinary income.

4. How do I handle liquid staking if I use multiple platforms?

Each platform should be tracked separately. Maintain a detailed record of all deposits, withdrawals, rewards, and sales across platforms to ensure accurate reporting on your tax return.