In a recent post on X, Ripple’s Chief Technology Officer David Schwartz offered a thought-provoking perspective on the nature of crypto staking—particularly how it differs from traditional financial concepts like interest income and dividends. His comments come at a pivotal moment, as global tax authorities, including the U.S. Internal Revenue Service (IRS), grapple with how to classify staking rewards for tax purposes.
"The creation of new value and the transfer of existing value are two different things. Staking is the former. Interest income is the latter."
— David "JoelKatz" Schwartz (@JoelKatz)
This distinction lies at the heart of an ongoing debate within the cryptocurrency community: should staking rewards be taxed as income when received, or should they be treated differently due to their unique economic mechanics?
Understanding the Nature of Staking Rewards
David Schwartz emphasized that staking is not a passive receipt of value but an active process of value creation. According to him, staking rewards don’t represent a transfer of wealth from one party to another—they are newly minted assets generated as part of the blockchain’s consensus mechanism.
“You don’t earn staking rewards, you create them. They didn’t exist before you created them,” Schwartz explained. This contrasts sharply with traditional interest income, such as that earned from savings accounts or bonds, where funds are transferred from a financial institution to an account holder.
In proof-of-stake (PoS) blockchains, validators lock up their tokens to help secure the network, validate transactions, and maintain decentralization. In return, the protocol issues new tokens as rewards—a process that increases the token supply rather than redistributing existing holdings.
This fundamental difference suggests that treating staking rewards identically to interest income may overlook the technological and economic realities of blockchain systems.
How Is Crypto Staking Different From Stock Dividends?
A common analogy used to explain staking is comparing it to receiving dividends from stock ownership. However, Schwartz pushed back against this comparison.
When shareholders receive dividends, they are getting a portion of profits that were previously earned and distributed by a company. The value was created by the company’s operations and then transferred to investors.
In contrast, crypto staking does not involve receiving pre-existing value. Instead, participants generate new digital assets by contributing computational resources and network security. “Staking is creating property, not receiving it from someone else who earned/created it,” Schwartz clarified.
This distinction has significant implications for both regulatory classification and investor understanding. If staking is fundamentally an act of creation rather than redistribution, it may warrant different tax treatment compared to dividend or interest income.
IRS Ruling: Staking Rewards Are Taxable Income
Despite these technical arguments, tax authorities have taken a more pragmatic approach. In 2023, the IRS issued guidance stating that cryptocurrency received through staking or mining is taxable upon receipt. The agency considers these rewards as ordinary income, valued at their fair market price at the time they are received.
This means that even if a staker does not immediately sell their rewards, they may still owe taxes based on the token’s value at the time it was added to their wallet.
The IRS position has sparked controversy and legal challenges. One high-profile case involves a Tennessee couple who have filed a lawsuit against the government over the taxation of their staking activities on the Tezos network. They argue that taxing staking rewards before they are liquidated imposes an unfair burden on crypto holders and misrepresents the economic nature of staking.
Their case could set a precedent for how U.S. courts interpret crypto taxation—and whether they accept technological arguments like those made by Schwartz.
Why This Debate Matters for Crypto Investors
The classification of staking rewards affects millions of crypto users who rely on staking for passive income. With major PoS blockchains like Ethereum, Solana, Cardano, and Tezos offering annual percentage yields (APYs) ranging from 3% to over 10%, staking has become a core component of decentralized finance (DeFi) strategies.
Investors need clarity on tax obligations to make informed decisions. Uncertainty can deter participation, especially among retail users who may lack access to specialized tax advice.
Moreover, inconsistent global regulations create compliance challenges. While the U.S. treats staking rewards as income, other jurisdictions may have different rules—leading to potential double taxation or reporting complexities for international users.
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The Future of Staking and Regulatory Clarity
As blockchain technology evolves, so must regulatory frameworks. Policymakers face the challenge of balancing innovation with consumer protection and tax compliance.
Some experts suggest a hybrid model—where staking rewards are recognized as newly created assets but taxed only upon disposal or sale, similar to capital gains treatment. Others advocate for special tax categories tailored to blockchain-specific activities.
Until such reforms emerge, users must navigate existing rules carefully. Accurate record-keeping, real-time valuation tracking, and consultation with tax professionals are essential for compliant staking participation.
Frequently Asked Questions (FAQ)
Q: Are crypto staking rewards taxable in the U.S.?
A: Yes, according to IRS guidance from 2023, staking rewards are considered taxable income at the time they are received, based on their fair market value.
Q: How is staking different from earning interest?
A: Interest involves receiving existing value transferred by another party (e.g., a bank). Staking involves creating new value through network validation—no prior holder gives up assets.
Q: Can I be taxed on staking rewards I haven’t sold yet?
A: Yes. Under current IRS rules, taxation occurs upon receipt, regardless of whether you’ve sold or used the tokens.
Q: Does David Schwartz’s view change how taxes are applied?
A: Not currently. While his technical argument is influential in policy discussions, it doesn’t override existing IRS regulations.
Q: Is there a legal challenge to crypto staking taxation?
A: Yes. A notable lawsuit by a Tennessee couple staking Tezos tokens challenges the IRS’s treatment of staking rewards as immediate taxable income.
Q: What blockchains use proof-of-stake and offer staking rewards?
A: Major PoS networks include Ethereum, Cardano, Solana, Polkadot, and Tezos—all allowing users to earn rewards by participating in network validation.
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Final Thoughts
David Schwartz’s insights underscore a critical gap between technological reality and regulatory interpretation in the crypto space. While staking is technically an act of value creation, tax systems continue to treat it as income receipt.
Bridging this gap will require ongoing dialogue between developers, regulators, and legal experts. For now, investors should remain informed, compliant, and proactive in understanding both the opportunities and obligations that come with participating in decentralized networks.
As blockchain adoption grows, so too will the demand for nuanced policies that reflect how these systems actually work—not just how they resemble traditional finance.
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