The Tax Court Weighs In: Staking Rewards Are Taxable on Receipt in Paschall v. Commissioner

June 8, 2026

Case Background and Holdings

On June 4, 2026, the United States Tax Court issued its opinion in Paschall v. Commissioner, T.C. Memo. 2026-46, holding that cryptocurrency staking rewards are includible in gross income in the year the taxpayer receives them — not deferred until the rewards are later sold or exchanged. The decision is the first reasoned judicial treatment of a question that has lingered over the proof-of-stake ecosystem for years, and it lands at a moment when Congress is actively considering legislation that could rewrite the answer.

During 2021, Mr. Paschall held Cardano tokens in an account with the digital asset platform eToro, which by default staked customers’ Cardano on a proof-of-stake blockchain and distributed rewards monthly in the form of additional Cardano tokens. Customers received between 75% and 90% of the rewards, with eToro retaining the balance as a fee, and customers could opt out of staking at any time. Mr. Paschall never opted out, received $33,354 in staking rewards that were indistinguishable from his existing tokens and convertible to cash at will, and did not report that amount as income. The IRS issued a notice of deficiency determining a $24,599 tax deficiency and a related accuracy penalty, leaving the court to decide, as a matter of law, whether the rewards were taxable upon receipt.

The court grounded its analysis squarely in Section 61 of the Internal Revenue Code and the foundational case law construing it. Gross income means “all income from whatever source derived,” and the Supreme Court’s decision in Commissioner v. Glenshaw Glass Co. sweeps into that definition all “accessions to wealth, clearly realized, and over which the taxpayers have complete dominion”. Applying that standard, the court found that Mr. Paschall had dominion and control over the rewards the moment they were credited to his account: the tokens were subject to no sale restrictions and could be converted to cash at any time, and the “power to dispose of income is the equivalent of ownership of it”. A temporary restriction on transferring the tokens to wallets outside eToro did not change the result, because Mr. Paschall retained the ability to sell throughout.

Notably, the petitioners leaned on Jarrett v. United States, the well-known Tennessee litigation in which the government conceded a refund to a pair of taxpayers who advanced similar arguments, thus intentionally mooting their case. The Tax Court gave that concession no weight, observing that the Jarrett court never reached the merits of the taxpayers’ position and that the government’s refund concession in that case “is not binding here”.

The court also dispatched two creative theories the petitioners offered to defer taxation. First, the petitioners invoked Eisner v. Macomber and analogized staking rewards to pro rata stock dividends, which generally are not taxable on receipt. The court rejected the analogy, explaining that — unlike a stock dividend, which merely subdivides existing ownership without altering any shareholder’s proportionate interest — staking rewards are not received pro rata by all token holders, require the holder to stake and bear a risk of forfeiture, and increase both the staker’s proportionate interest in the token and the aggregate supply of tokens in circulation. Second, the petitioners argued that staking rewards are “self-created property,” akin to a baker’s cake or a writer’s book — products of labor and capital that yield income only on sale. The court found that analogy misplaced because stakers “do not create anything by themselves”; the staked tokens validate transactions, and the protocol grants the new tokens in exchange for that validation service, with the staker lacking the baker’s or writer’s power to decide whether and when the property is created.

Practical Implications

One consequential feature of the opinion is what the court declined to rest on. Although the IRS’s position aligned with Revenue Ruling 2023-14 — which provides that staking rewards are included in gross income when the taxpayer “gains dominion and control” — the court expressly declined to rely on that ruling, citing it “only for completeness”. The petitioners had attacked the ruling as inapplicable, non-retroactive, and undeserving of deference after Loper Bright, but the court held it “need not address” those arguments because neither the government’s position nor the court’s conclusion rested on the ruling. As the court put it, “section 61 and related caselaw doom their position”. The practical significance is meaningful: by anchoring its holding in the statute and Supreme Court precedent rather than sub-regulatory guidance, the court insulated its conclusion from the administrative-deference challenges that have proliferated in the wake of Loper Bright.

A few important caveats temper the reach of the decision. Paschall is a T.C. Memo. opinion and is therefore not binding precedent, though it is a clear signal of how the Tax Court views the issue and a useful preview of the reasoning taxpayers will face. The court also repeatedly flagged that the absence of expert testimony hampered its analysis of the underlying token mechanics, leaving room for a better-developed record to sharpen — or complicate — the analysis in a future case. Additionally, the holding speaks to the timing of income, not its ultimate amount or character, with the $33,354 value having been stipulated by the parties.

Most importantly, the current-law result may not be the last word. Two pending measures — the CLARITY Act, which would establish a comprehensive market-structure taxonomy dividing digital assets between CFTC and SEC oversight, and the Digital Asset PARITY Act introduced in the House — could materially alter the deferral regime that Paschall applied. The latest draft of the PARITY Act is especially relevant: it specifically governs “digital assets acquired through validation activities,” and, critically, would let an electing validator exclude newly created staking tokens from gross income on receipt, deferring recognition until disposition, at which point gains would generally be treated as long-term capital gains. The bill would also provide that passive staking is not a trade or business. In other words, the very deferral outcome the Tax Court rejected as a matter of current law is precisely what this legislation would authorize by election. Until and unless that legislation is enacted, however, Paschall reflects the prevailing analysis, and taxpayers receiving staking rewards should plan to recognize income on receipt while monitoring the CLARITY and PARITY Acts closely — their progress could change the calculus for the entire proof-of-stake economy.

This post is for general informational purposes only and does not constitute legal or tax advice. For further information, contact: Michael Frisch (mfrisch@crokefairchild.com), David Lopez-Kurtz (dlopezkurtz@crokefairchild.com), Tanner Dowdy (tdowdy@crokefairchild.com), Ariella Guardi (aguardi@crokefairchild.com), Bakhtawar Mirjat (bmirjat@crokefairchild.com), or Max Markoff (mmarkoff@crokefairchild.com).