Paschall v. Commissioner: Tax Court Rules Cryptocurrency Staking Rewards Are Taxable Income Upon Receipt

The $33,354 Question: Are Cryptocurrency Staking Rewards Taxable Income?

The stakes couldn’t be higher in Paschall v. Commissioner—a case that could force crypto investors to rewrite their tax strategies. The Internal Revenue Service has come down hard on Alvie and Patricia Paschall, slapping them with a $24,599 deficiency for failing to report $33,354 in staking rewards as income for tax year 2021. But the real battle isn’t just about this couple’s tax bill. It’s about whether the Tax Court will affirm the IRS’s aggressive position that cryptocurrency staking rewards are taxable income the moment they’re received—regardless of whether the taxpayer sells or even accesses the rewards.

The court’s ruling in T.C. Memo. 2026-46 marks a pivotal moment in digital asset taxation. For years, the IRS has struggled to define clear rules for crypto taxation, leaving taxpayers and practitioners in a legal gray area. Now, the Tax Court has stepped in with a definitive answer: staking rewards are taxable income under Section 61(a), which broadly defines gross income as “all income from whatever source derived.” This decision doesn’t just settle a dispute—it reshapes how crypto investors must account for rewards, potentially exposing thousands of stakers to retroactive tax liabilities and penalties.

The implications are sweeping. If staking rewards are taxable upon receipt, taxpayers must track the fair market value of every reward at the moment it’s earned—even if it’s automatically restaked or locked in a protocol. The IRS’s stance, now validated by the court, means that passive crypto investors could face unexpected tax bills based on volatile asset prices. For an industry already grappling with regulatory uncertainty, this ruling underscores the need for clearer guidance—or more litigation.

The Crypto Staking Saga: How the Paschalls Ended Up in Tax Court

The stakes could not have been higher when the Paschalls received a $33,354 tax bill from the IRS for unreported cryptocurrency staking rewards—a sum that now looms over a dispute that could redefine how passive crypto investors account for their earnings. The case traces back to a single digital asset platform, eToro, and its automated staking service for Cardano (ADA), a cryptocurrency operating on a proof-of-stake blockchain where validators earn rewards for securing the network. Unlike Bitcoin’s energy-intensive proof-of-work model, Cardano’s protocol randomly selects validators based on the number of tokens they stake, distributing new ADA tokens as rewards. These rewards are not mere theoretical gains—they are real, transferable assets that can be sold for cash at any time, creating a taxable event the moment they are received.

Mr. Paschall’s journey began in 2020 when he opened a hosted wallet on eToro, a digital asset platform that functions like a brokerage for cryptocurrencies. His account held Cardano tokens, a cryptocurrency built on a proof-of-stake blockchain where validators earn rewards for validating transactions. Unlike Bitcoin’s proof-of-work system, which relies on energy-intensive mining, Cardano’s proof-of-stake protocol randomly selects validators based on the number of tokens they stake, distributing new ADA tokens as rewards. These rewards are not theoretical—they are real, transferable assets that can be sold for cash at any time.

On October 1, 2020, eToro launched a staking service for Cardano holders, automatically enrolling customers unless they opted out. The service worked by delegating customers’ ADA to eToro’s staking pool, where validators earned rewards that were then distributed back to customers monthly in the form of additional Cardano tokens. Customers retained ownership of their original tokens but received proportional staking rewards, with eToro taking a 10% to 25% fee depending on the account level. Crucially, the rewards were indistinguishable from the existing tokens in the account and could be sold or transferred at any time—unless restricted by platform policies.

For tax year 2021, Mr. Paschall’s Cardano tokens were staked through eToro for the entire year without his intervention. No action was required on his part; the rewards simply appeared in his account each month as additional ADA tokens. The tokens were his to sell, but he did not report the staking rewards as income. Then, on November 23, 2021, eToro notified customers that it would delist Cardano in early 2022, imposing restrictions on transfers until the end of the year. Though Mr. Paschall could still sell his tokens, he did not, and in 2022 he moved his remaining ADA to another platform.

The IRS took notice. In 2022, eToro issued Mr. Paschall a Form 1099-MISC reporting the staking rewards he had received in 2021 as miscellaneous income. The Paschalls did not include this amount on their tax return, prompting the IRS to issue a Notice of Deficiency for $33,354 in unpaid tax. The dispute that followed would force the Tax Court to confront a fundamental question: When, if ever, do cryptocurrency staking rewards become taxable income?

The Great Staking Debate: Petitioners vs. IRS

The Paschalls and the IRS presented diametrically opposed visions of when cryptocurrency staking rewards become taxable income—a dispute that would determine whether the Paschalls owed $33,354 in unpaid tax for 2021. The Tax Court’s resolution hinged on two competing theories of income realization: the Paschalls argued that staking rewards lacked the essential elements of taxable income, while the IRS contended that the rewards represented clear accessions to wealth under settled tax principles.

The Paschalls advanced four core arguments to shield the staking rewards from taxation. First, they claimed they lacked dominion and control over the rewards because eToro’s platform imposed transfer restrictions. Under Helvering v. Horst, income is taxable only when the taxpayer has "complete dominion" over it, and the Paschalls argued that eToro’s control over the staking process—including delayed withdrawals and platform-specific restrictions—prevented them from exercising unfettered access to the rewards. They pointed to Corliss v. Bowers, where the Supreme Court held that retained control over property could trigger taxation, as evidence that the absence of dominion should preclude income recognition.

Second, the Paschalls invoked Eisner v. Macomber, the landmark case holding that stock dividends are not taxable income because they merely represent a proportional increase in existing property rather than a new accession to wealth. They argued that staking rewards functioned similarly to stock dividends: Cardano’s fixed supply of tokens meant that staking simply increased a holder’s proportionate ownership without creating new wealth. The Paschalls framed staking as a self-created property process, likening it to baking a cake—where the baker’s labor (staking) produced a new asset (rewards) that should only be taxed upon sale, not receipt.

Third, the Paschalls challenged the IRS’s reliance on Revenue Ruling 2023-14, arguing it was retroactively applied to their 2021 tax year in violation of due process. They contended that the ruling, which classified staking rewards as taxable income upon receipt, contradicted prior IRS guidance and lacked the force of law. The Paschalls also seized on the Supreme Court’s recent decision in Loper Bright Enterprises v. Raimondo, which overturned Chevron deference, to argue that courts should no longer defer to the IRS’s interpretation of ambiguous tax statutes. Without deference, they claimed, Revenue Ruling 2023-14 should carry no weight in their case.

The IRS, in contrast, marshaled a battery of statutory and judicial authorities to argue that staking rewards were unquestionably taxable income under Section 61(a), which defines gross income as "all income from whatever source derived." The IRS emphasized the Supreme Court’s holding in Commissioner v. Glenshaw Glass Co., where the Court ruled that gross income includes "all accessions to wealth, clearly realized, over which the taxpayer has complete dominion." The IRS argued that staking rewards fit this definition perfectly: they were undeniable accessions to wealth, realized the moment the rewards were credited to the Paschalls’ eToro account, and were fully within their control once distributed.

To reinforce its position, the IRS invoked the constructive receipt doctrine under Treasury Regulation § 1.451-2(a), which treats income as received when it is "credited to the taxpayer’s account, set apart for them, or otherwise made available" without restriction. The IRS contended that the Paschalls’ staking rewards were constructively received in 2021 because they were credited to their eToro account and available for withdrawal, even if they chose not to access them. The IRS distinguished this from stock dividends, noting that staking rewards increase both a taxpayer’s proportion of ownership and the total supply of tokens—a key difference from Macomber, where the number of shares remained constant.

The IRS also relied on Notice 2014-21, its initial guidance classifying virtual currency as property, and Revenue Ruling 2023-14, which explicitly addressed staking rewards. The IRS dismissed the Paschalls’ retroactivity argument, asserting that Revenue Ruling 2023-14 merely clarified existing law rather than introducing a new rule. It further argued that Loper Bright did not undermine its position, as the ruling did not invalidate the IRS’s authority to issue guidance under Section 61(a). The IRS maintained that staking rewards were distinguishable from self-created property, as the tokens were not produced by the Paschalls’ labor but rather granted by the Cardano protocol—a distinction it claimed aligned with United States v. Pulsifer, which treated mined Bitcoin as income but not as self-created property in the same sense.

The Court's Verdict: Staking Rewards Are Taxable Income

The Tax Court’s decision in Paschall v. Commissioner marks a definitive rejection of the argument that cryptocurrency staking rewards should escape taxation until sold or disposed of. In a sweeping application of foundational tax principles, the court held that the $33,354.27 in Cardano staking rewards received by Mr. Paschall in 2021 constituted gross income under Section 61(a), which defines gross income as “all income from whatever source derived.” The court’s reasoning rested on four pillars: dominion and control, the rejection of the dividends analogy, the dismissal of self-created property claims, and the irrelevance of Revenue Ruling 2023-14 to the outcome.

Dominion and Control: The Glenshaw Glass Standard Applied

The court grounded its holding in the Supreme Court’s expansive definition of gross income in Commissioner v. Glenshaw Glass Co., which established that income includes “all accessions to wealth, clearly realized, over which the taxpayer has complete dominion and control.” The IRS argued that Mr. Paschall’s receipt of staking rewards—additional Cardano tokens credited to his eToro account—met this standard because he could convert them to cash at any time. The court agreed, emphasizing that the ability to dispose of property is the equivalent of ownership, as articulated in Helvering v. Horst.

The Paschalls countered that eToro’s restriction on transferring Cardano tokens to external wallets negated dominion and control. The court dismissed this claim, noting that the restriction did not prevent conversion to cash, and that such limitations on transferability do not equate to a lack of ownership. The court cited Webber v. Commissioner, where it held that restrictions on withdrawal methods (e.g., cash-only) do not negate control. Thus, the court concluded that Mr. Paschall’s accession to wealth upon receipt of the staking rewards was complete and taxable, regardless of his choice not to sell the tokens during 2021.

The Dividends Analogy: Why Macomber Does Not Apply

The Paschalls advanced an analogy to Eisner v. Macomber, the 1920 Supreme Court case holding that pro rata stock dividends are not taxable income because they do not represent a realized accession to wealth. They argued that staking rewards, like stock dividends, merely increase the proportion of ownership in a finite pool of tokens without altering the underlying value. The court rejected this comparison, distinguishing Macomber on two critical grounds.

First, the court noted that staking rewards increase both the proportion and the aggregate value of the taxpayer’s holdings. Unlike a stock dividend, which leaves the corporation’s total value unchanged, staking rewards expand the supply of tokens in circulation, thereby increasing the overall market value of the asset. The court observed that the parties stipulated the value of the rewards was $33,354.27, and there was no evidence that the per-token value of Cardano declined proportionally to offset this increase.

Second, the court emphasized that staking is not automatic or universal. Unlike stock dividends, which are distributed to all shareholders in proportion to their holdings, staking rewards require active participation—token holders must stake their tokens and risk forfeiture. The court noted that not all Cardano holders staked their tokens, and those who did could opt out of the service. This voluntary, risk-bearing nature of staking undermined the analogy to Macomber, where the distribution was mandatory and did not alter the taxpayer’s economic position.

Self-Created Property: The Baker’s Cake Analogy Fails

The Paschalls also invoked the concept of self-created property, arguing that staking rewards are akin to a baker’s cake or a writer’s book—products of labor and capital that should only be taxed upon sale. The court rejected this framing, distinguishing staking from creative or labor-intensive activities that result in new, tangible property.

The court noted that stakers do not create tokens through their own labor; instead, the Cardano protocol grants additional tokens as a reward for validating transactions. Unlike a baker, who mixes ingredients to produce a new cake, or a writer, who crafts a novel, stakers merely delegate existing tokens to participate in the network’s consensus mechanism. The court further observed that the Paschalls lacked decision-making power over the creation or timing of the rewards, as the protocol’s rules govern the issuance and distribution.

The IRS had argued that this distinction aligned with United States v. Pulsifer, where the Eighth Circuit treated mined Bitcoin as income but not as self-created property in the same sense as traditional capital assets. The court agreed, concluding that staking rewards are not self-created property but rather new tokens granted by the protocol, making them taxable upon receipt.

Revenue Ruling 2023-14: A Consistent but Unnecessary Guide

The Paschalls sought to undermine the court’s conclusion by invoking Loper Bright Enterprises v. Raimondo, arguing that the 2023 ruling stripped the IRS of deference to its guidance. They also claimed that Revenue Ruling 2023-14, which held that staking rewards are taxable income upon receipt, could not apply retroactively to 2021. The court sidestepped these arguments entirely, stating that its conclusion rested on Section 61(a) and related caselaw, not the revenue ruling.

The court acknowledged Revenue Ruling 2023-14 only for completeness, noting that it was consistent with its holding but not binding. Citing Webber v. Commissioner, the court reiterated that revenue rulings are not binding and are afforded weight only to the extent of their persuasiveness. The court’s emphasis on the broad definition of gross income under Section 61(a)—and the absence of any explicit exemption for staking rewards—underscored its exercise of independent judicial authority, free from deference to agency interpretations.

The Broader Implications: A Judicial Power Play

The court’s decision is notable not only for its conclusion but for its assertion of judicial power over the IRS’s interpretive authority. By grounding its holding in Section 61(a) and rejecting the need to rely on Revenue Ruling 2023-14, the court signaled that it will not defer to agency guidance when the statute is clear. This approach aligns with the post-Loper Bright landscape, where courts are expected to exercise independent judgment in interpreting tax laws.

The court’s reasoning also reflects a deliberate expansion of taxable events in the digital asset space. By treating staking rewards as income upon receipt—regardless of whether the taxpayer sells or disposes of the tokens—the court aligned itself with the IRS’s longstanding position that “accessions to wealth” are taxable when realized, even if not monetized. This expansive view of gross income places the burden on taxpayers to track and report staking rewards at the moment of receipt, a requirement that may prove administratively burdensome for many.

The Aftermath: What This Means for Crypto Taxpayers

The Tax Court’s ruling in Paschall v. Commissioner did more than resolve a $33,354 tax dispute—it set a precedent that will ripple through the cryptocurrency ecosystem for years to come. By affirming that staking rewards are taxable income upon receipt, the court has forced taxpayers, exchanges, and the IRS into uncharted territory where the rules of engagement are still being written.

For taxpayers, the immediate takeaway is clear: staking rewards must be reported as gross income at fair market value the moment they are received, regardless of whether the tokens are sold, staked further, or held indefinitely. This requirement, grounded in § 61(a)—which defines gross income broadly as "all accessions to wealth, clearly realized"—places a significant administrative burden on individuals who must now track every reward epoch, even for small amounts. The court’s rejection of the argument that staking rewards resemble dividends (as in Eisner v. Macomber) or self-created property further narrows avenues for tax planning, leaving little room for interpretation. Taxpayers who fail to report these rewards risk penalties, audits, and potential litigation, especially as the IRS increasingly targets crypto-related income.

The crypto industry now faces a compliance crisis. Exchanges like Coinbase and Kraken, which offer staking services, must adapt their reporting mechanisms to ensure customers receive accurate Form 1099-K or 1099-B statements for staking rewards. The lack of expert testimony in Paschall underscores a broader problem: the IRS has not provided clear guidance on how to value staking rewards across different blockchains. For proof-of-stake networks like Cardano, where rewards are distributed in 5-day epochs, this means taxpayers must rely on third-party tools like Koios or PoolTool to calculate fair market value at the exact moment of receipt. The court’s alignment with Revenue Ruling 2023-14—which itself was issued without formal notice-and-comment rulemaking—highlights the IRS’s aggressive posture, but it also invites challenges under the recent Loper Bright decision, which limits deference to agency interpretations.

The IRS, meanwhile, has been emboldened by this ruling. The court’s decision to not rely on Revenue Ruling 2023-14—instead grounding its holding in broader tax principles—suggests that the agency may pursue similar cases with greater confidence, even in the absence of formal guidance. This could lead to a wave of audits targeting staking rewards, airdrops, and other crypto-related income streams. The IRS’s willingness to litigate rather than issue further guidance post-Loper Bright means taxpayers can expect less predictability and more disputes over valuation methods, constructive receipt, and dominion and control.

For future taxpayers, the Paschall decision serves as a warning: the Tax Court is willing to exercise its authority to expand the definition of gross income in the digital asset space, and it will not hesitate to reject arguments that rely on analogies to traditional financial instruments. The court’s reasoning—particularly its emphasis on dominion and control—may also have implications beyond staking, potentially influencing how other crypto transactions, such as liquidity mining or yield farming, are taxed. Taxpayers engaged in these activities should prepare for increased scrutiny, as the IRS is likely to apply the same principles to other forms of passive income in the crypto economy.

The lack of expert testimony in Paschall further exposes a critical gap in the IRS’s approach: the agency has not provided sufficient guidance on how to value staking rewards in real time. Without clear rules, taxpayers are left to navigate a patchwork of tools and methodologies, increasing the risk of misreporting. The court’s decision to side with the IRS on this issue may pressure the agency to issue more detailed regulations, but in the interim, taxpayers must tread carefully.

Ultimately, Paschall marks a turning point in crypto taxation. The court’s expansive view of gross income—treating staking rewards as taxable the moment they are received—places the burden squarely on taxpayers to comply with complex reporting requirements. For the IRS, it signals a willingness to litigate rather than clarify, while for the crypto industry, it demands immediate action to adapt to a regulatory landscape that is only becoming more stringent. The question now is not whether staking rewards are taxable, but how taxpayers will meet the challenge of reporting them accurately in an environment where the rules are still being written.