Staking is the act of allocating cryptocurrencies to a wallet and earning interest on the funds. It’s similar to a savings account, representing an easy way to earn additional crypto.
Generally, your stake benefits a blockchain network such as Tezos, Cosmos, Polkadot and now Ethereum 2.0 with it’s recent upgrade. Proof of Stake will continue to become a more important topic over time as investors flock to true pure Proof of Stake systems like Ethereum due to the passive income abilities.
Stakers are also known as validators, because they validate the transactions coming into the network. This process is called Proof-of-Stake, because users are placing their funds at stake, which will be rewarded if they are positively aligned with the system’s consensus rules. It’s similar to cryptocurrency mining but without the energy requirements. Anyone with the funds can become a validator, unlike mining, which requires expensive, complex & powerful computer parts. This is why the network rewards you for staking – it needs your funds to survive.
The more you stake, the more you’ll make in passive income. As a validator, you also get more say in the network when it comes to high-level decisions. The idea is that those with the most stake in a network have its best interests in mind.
How is Staking Taxed?
Taxes on staked cryptocurrency are perceived differently by various sources. Speaking to CoinTelegraph, Arizona Congressman David Schweikert claims he’s “just trying to get it on their radar,” referring to the IRS. Many expect staking to be taxed similar to cryptocurrency mining, which is taxed as income. This means rewards are to be reported based on their fair market value at the time they are received.
Others don’t count their rewards as taxable events until they sell or convert the crypto into another asset. In this case, stakers could potentially hold their rewards for years until creating a taxable event. Their justification? That staking reward can’t be classified as income. Often making comparisons to a stock split, but this line of thinking has yet to be publicly validated by any respectable tax professionals.
Considering there isn’t official guidance from the IRS, stakers are advised to be careful when it comes to reporting their rewards. Luckily, there is a way to get staking rewards completely tax-free!
Why Stake Inside of an IRA?
If you’re worried about taxation on your staking rewards, it’s worth considering doing it inside of an IRA. This is where we can help.
A Roth IRA ensures your cryptocurrency rewards and investments are tax-free, meaning you don’t have to worry about any future taxation. This is the easiest way to hold and profit from cryptocurrencies while saving on taxes in the long-term. Not only is the staking income tax free, but you even have the ability to trade tax free as well.
There’s also the Traditional IRA (or even a SEP IRA for those who own their own business), which not only defers your taxes until funds are withdrawn, but even gives you a tax write off when you originally place funds in the IRA.
How can I learn more?
While a Crypto IRA might sound daunting, it’s just as simple as any investment platform. You set up an account, fund it with dollars and you start trading! You don’t need to be technically minded to invest with us, we manage all the complexities. You just login and trade anytime, 24/7!
While staking has yet to be enabled on our platform, we hope to support Ethereum and other Proof of Stake networks in early 2021.
If you want to learn more, head to www.iTrustCapital.com and visit our Knowledge Center.