Ripple CTO Differentiates Crypto Staking from Traditional Income Amid IRS Tax Ruling

• The IRS confirms staking rewards are taxable upon receipt, sparking debate within the crypto industry.
• David Schwartz asserts that crypto staking involves creating new assets, not receiving existing property.
• Investor Joshua Jarrett’s lawsuit challenges the IRS’s classification of staking rewards as taxable income.

Ripple CTO David Schwartz has weighed in on the growing debate over crypto staking and taxation following the U.S. Internal Revenue Service (IRS) ruling that staking rewards are taxable upon receipt.

Commenting under a tweet regarding the IRS’s decision that crypto staking is taxable, Schwartz distinguished staking from traditional income amid community debate. He emphasized that staking involves creating new assets rather than receiving property from others.

Staking vs. Dividends: Key Differences

Critics, including Nido, argue that staking rewards are akin to earning interest on deposits or stock dividends. However, Schwartz countered that interest or dividends involve existing value, and staking generates entirely new tokens, making it a fundamentally different process.

“Staking is creating property, not receiving it from someone else who earned or created it,” Schwartz said.

When you get dividends from stocks, someone else created/earned them and transferred them to you. With crypto staking, you create the property you receive. Staking is creating property, not receiving it from someone else who earned/created it.

— David “JoelKatz” Schwartz (@JoelKatz)
December 23, 2024

Schwartz also says if dividends were treated the same as crypto staking, the IRS would argue that a dividend is taxable income for the company that issued it at its creation.

Liquidity Pools and Loans

In addition, the Ripple executive addressed hypothetical scenarios involving liquidity pools and collateralized loans. He noted that borrowing against liquidity pool tokens, instead of selling them, could defer capital gains taxes. 

“You probably could avoid capital gains tax on selling the tokens if the system lets you borrow against them instead,” Schwartz remarked.

In one example, an investor could use appreciated liquidity tokens as collateral for short-term loans. This lets them access funds without triggering taxable events. This approach could delay tax obligations until the loan is repaid or the position is unwound.

IRS Ruling and Industry Impact

The IRS’s stance comes during a lawsuit filed by cryptocurrency investor Joshua Jarrett. He challenges the agency’s classification of staking rewards as taxable income. Jarrett argues that staking rewards should not be taxed until they are sold or exchanged, similar to other forms of property.

However, the IRS maintains that staking rewards give taxpayers “dominion and control” upon receipt, making them taxable as gross income. This position aligns with Revenue Ruling 2023-14, which has sparked significant debate within the crypto community.

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