The proliferation of proof-of-stake (PoS) networks, such as Cardano and Ethereum, has introduced a new channel for cryptocurrency enthusiasts to earn rewards – staking. Unlike mining, which necessitates considerable investments in hardware and energy resources, staking serves as a rewarding and accessible option.
Staking involves pledging crypto assets to help validate transactions on the network. Validators are chosen based on the amount of cryptocurrency they hold in their nodes; staked crypto assets contribute to the security and stability of the blockchain. Validators, and those who delegate coins to them, receive rewards proportional to their staked amount.
Staking requires little technical know-how, and various cryptocurrencies offer potential yields for stakers. Yield rates may vary among networks and depend on the number of active validators. Common ways of staking include running your own node as a validator or delegating coins to a validator. In exchange for a commission on staking rewards, delegating allows investors to benefit from the nodes maintained by validators.
A new industry, known as staking-as-a-service (SaaS) has emerged, with companies such as Staked, Figment Network, MyContainer, Stake Capital, and Stake.Fish offering these services. It’s crucial to understand that delegating coins does not transfer their custody; assets remain under the owner’s control.
Most cryptocurrency exchanges, like Binance, Coinbase, and Kraken, operate validators, enabling customers to stake through user-friendly interfaces. Offerings differ in terms of available cryptocurrencies, fees, and locking periods. However, some exchanges do not provide staking services, with jurisdictions such as New York and Hawaii restricted due to regulations.
On the taxation front, staking cryptocurrency remains a gray area. Given its novelty, tax authorities worldwide are yet to form an official position on how to tax it. For instance, the UK’s tax authority classifies staking along the lines of crypto mining, while the US Internal Revenue Service’s guidance only pertains to mining.
As staking rewards have an established market value upon creation, some argue they should be taxed as income. However, this would result in millions of taxable events over a calendar year for staking on certain blockchains.
The debate on staking taxation continues, with the best course of action being to consult a tax advisor experienced in handling cryptocurrency accounting. Meanwhile, the rise of staking can be attributed to its convenience and the environmental critiques against proof of work. With approximately 15% of all Ethereum (ETH) currently staked following the Merge of 2022, staking appears to have a promising future in the world of cryptocurrencies.