Tax Treatment of Rewards Earned through Cryptocurrency Staking

Tax treatment of cryptocurrency staking rewards

The activity in question is acting as a validator of transactions on cryptoasset blockchain networks through the process known as “staking.”

This activity is a type of consensus mechanism for validating and creating blocks, used as an alternative to mining on some blockchain networks. It is known as “proof of stake” or, more commonly, “staking.”

Staking involves locking cryptoassets in an electronic wallet for a period of time through a smart contract. The greater the amount of cryptoassets locked, the higher the probability that the system will select the participant to validate blocks and receive a reward, generally in the same type of cryptoasset.

The term “staking” is commonly used both for the validator’s own activity—locking cryptoassets and maintaining the software used to validate blocks—and for an investment option offered in the cryptoasset sector. Under the latter, cryptoassets are locked and made available to a particular validator so that the validator has a greater chance of being selected and rewarded; the reward is then shared with those who kept their cryptoassets locked.

Rewards may depend on various factors, including the amount of cryptoassets locked and how long they remain locked.

1. First, for tax purposes, it is necessary to consider whether this activity constitutes an economic activity.

In this regard, Article 27(1) of Law 35/2006 of 28 November on Personal Income Tax and partially amending the laws on Corporation Tax, Non-Resident Income Tax and Wealth Tax (Official State Gazette of 29 November 2006; hereinafter, “LIRPF”) provides as follows:

1. Income from economic activities includes income which, deriving jointly or separately from personal work and capital, involves the taxpayer independently organising production resources and human resources, or either of them, for the purpose of participating in the production or distribution of goods or services.

In particular, this includes income from extractive, manufacturing, commercial and service activities, including crafts, agriculture, forestry, livestock, fishing, construction, mining, and the practice of liberal, artistic and sporting professions.

[…]

Therefore, for an activity to qualify as an economic activity for Personal Income Tax purposes, the taxpayer must independently organise production resources and human resources, or either of them, with the aim of participating in the production or distribution of goods or services.

The Directorate-General for Taxation has consistently interpreted the classification of income as income from economic activities, based on this organisation criterion, as a question to be determined in each case in light of the circumstances.

As a general rule, where a person simply keeps cryptoassets locked and participates in block validation only if randomly selected by the computer protocol, with validation performed automatically using minimal resources, the activity cannot be regarded as involving sufficient organisation to constitute the independent organisation of production or human resources for the purpose of participating in the production or distribution of goods or services.

Accordingly, staking is not treated as an economic activity. Nor does it constitute employment income. The rewards received by the taxpayer should therefore be classified as gross income from movable capital, derived from lending the taxpayer’s own capital to third parties and paid in kind.

2. Gross income from movable capital

This category includes all forms of consideration, regardless of their name or nature, whether in cash or in kind, such as interest and any other form of remuneration agreed for the transfer of capital. It also includes amounts arising from the transfer, redemption, amortisation, exchange or conversion of any type of asset representing the raising and use of third-party capital.

Since cryptoassets generally are not regarded as transferable securities, the expenses referred to in Article 26(1)(a) of the LIRPF are not deductible.

Rewards paid in kind are valued at their market value in euros on the date they are received, in accordance with Article 43(1) of the LIRPF. The average exchange rate for that day may be used to value in euros cryptoassets received during the same day. The resulting amount is included in the recipient’s Personal Income Tax savings tax base, pursuant to Articles 46 and 49 of the LIRPF.

As regards the obligation to make a payment on account, this income is, in principle, subject to withholding or a payment on account under Article 75(1)(b) of the Personal Income Tax Regulations, approved by Royal Decree 439/2007 of 30 March (Official State Gazette of 31 March 2007; hereinafter, “RIRPF”). However, where the rewards are obtained directly from the system itself, there is no person required to withhold or make a payment on account within the meaning of Article 76 of the RIRPF; accordingly, no payment on account is made on these rewards.