Miners and stakers[1] play vital roles in validating digital asset transactions to add them to the blockchain.[2] Let’s take a look at what miners and stakers do in supporting the blockchain,[3] consider the associated technical jargon, understand the ways in which miners and stakers generate income, and how that income is taxed at present, and could be taxed in the future.

Blockchain

As I discussed in Part I of this series,[4] digital assets are reflected on a computer program called a “distributed ledger” that tracks asset ownership and blockchain transfers. As Geeks for Geeks explains, “A blockchain is a digital ledger of transactions distributed across the entire network of computers (or nodes) on the blockchain. Distributed ledgers use independent nodes to record, share, and synchronize transactions in their respective electronic ledgers instead of keeping them in one centralized server. […] Each transaction is recorded with an unchangeable cryptographic signature called a hash.”[5]   

Validation

Blockchains, as decentralized ledgers, span a computer network made up of independent nodes. When a new digital asset transaction take place between a buyer and seller, that transaction is checked to make sure it is legitimate by “validators” that come to a consensus agreement about that transaction’s history. Mining and staking are the two predominant forms of validation that take place prior to creating new blocks—that is, bundled blocks of new transactions.

So, “miners” and “stakers” validate blockchain transactions, but the methods they use in doing so differ. Both miners and stakers make sure that those transactions bundled together as a potential new “block” are legitimate—meaning that they have not been previously “spent.” Individual transactions have to be proven to be “unspent” before they can be included in a new block added to the blockchain’s permanent record. Speed, throughput, security, and energy usage differs according to the validation method used to effect this process. 

Mining

Mining is the validation method used by Proof-of-Work (PoW) blockchains. Bitcoin (BTC) and Litecoin (LTC) are examples of blockchains that use a Proof-of-Work consensus mechanism to validate blockchain transactions.

How it works

Miners use their computers to “listen” for cryptocurrency transactions that have not already been added to the blockchain. They batch those transactions into a block (usually containing several hundred transactions) to prepare them to be added to the blockchain. Miners compete with other miners to propose their block to be added to the blockchain, and they do this by first solving a cryptographic puzzle.

These puzzles can only be solved through trial and error; the miner’s computer hashes numbers trillions of times to arrive at a solution. The miner who solves the cryptographic puzzle first wins, and the block it bundled is added to the blockchain. Miners are compensated for their efforts with some form of block reward—typically, newly generated crypto tokens—as well as transaction fees paid in cryptocurrencies by the transaction participants.

Once a new block is added to the blockchain, the process starts again with miners batching transactions into blocks and attempting to solve cryptographic puzzles. By expending real world assets in the form of computer equipment and electricity, miners incur costs for which they are compensated only if they are the first to solve the cryptographic puzzle. They are incentivized to behave honestly, because a miner’s proposed block will be ignored if it contains already spent transactions, and it will have consumed real world resources in doing so. This type of consensus mechanism is called Proof-of-Work because each miner incurs costs in attempting to propose new blocks to the blockchain.

Observers claim that the advantages of Proof-of-Work consensus mechanisms are that they are strongly resistant to bad actors and can operate in public and unvetted environments where trust of the participants is not required. A Proof-of-Work blockchain can operate even where up to half of the participants are “dishonest.” On the downside, mining is an energy-intensive activity, so it has associated environmental concerns. Also, centralized pools of miners concentrate network computational power, which can approach or even exceed half of the computational power of the entire blockchain network, potentially compromising the security of the blockchain.

Staking

Staking is an alternative validation consensus mechanism, using a method known as “Proof-of-Stake” (PoS). Cardano (ADA) and Ethereum (ETH) are examples of blockchains that use a Proof-of-Stake consensus mechanism.

How it works

Staking works differently from mining. Stakers are chosen to confirm the block of transactions to be added to the blockchain. Rather than using real world assets to solve a cryptographic puzzle as in Proof-of-Work mining, validators in a Proof-of-Stake consensus mechanism pledge a “stake” of crypto tokens as collateral that is “at-risk” if the validator acts dishonestly. The more cryptocurrency staked as collateral by a staker, the more likely they are to be selected as a validator by the protocol. Stakers earn transaction rewards based on the amount they stake, their participation rates, and several other factors. Stakers that act dishonestly can lose their stakes’ collateral, and they may be banned from future participation in the validation process.

The advantages of Proof-of-Stake consensus mechanisms include speed of confirmation. Stakers are not engaged in trial-and-error puzzle-solving activities so Proof-of-Stake uses a fraction of the energy that is used by Proof-of-Work systems. Proof-of-Stake consensus mechanisms are, however, less secure than Proof-of-Work systems. They can operate when up to one-third of the validators act dishonestly, making blockchains that use Proof-of-Stake validation less secure than those that run on Proof-of-Work.

The SEC’s Division of Corporate Finance released a paper in May 2025, covering many core questions related to staking. “Covered crypto assets” “are intrinsically linked to the programmatic functioning of a public, permissionless network, and are used to participate in and/or earned for participating in such network’s consensus mechanism or otherwise used to maintain and/or earned for maintaining the technological operation and security of such network.”

In evident recognition of the complexities associated with staking, the SEC Corporate Finance staff specifically excludes crypto assets that have “intrinsic economic properties or rights, such as generating a passive yield or conveying rights to future income, profits, or assets of a business enterprise.” They also refer to other staking approaches, including “liquid staking,” “restaking,” and “liquid restaking.”

In addition, while protocols establish overarching rules on rewards, there is some variance in how “node operators” share rewards or impose fees for services above and beyond the protocol itself. Minimum staking and lock-up periods vary by protocol. Further, a node operator or validator can forfeit rewards if it engages in detrimental or prohibited network activities.

Additional complexity comes into play on some PoS networks where “the Covered Crypto Asset owners can stake their Covered Crypto Assets and receive validation rights that they can grant to a third party, thereby allowing the third party [delegators, nominators] to use the staked Covered Crypto Assets to verify transactions on the PoS Network on behalf of the owners.” The Custodian typically enters into an agreement with the owner, such as a user agreement or terms of service, providing that the owner retains ownership of the Covered Crypto Assets.[6]

Mining process

To recap, mining is a competitive process to validate new transactions on a distributed ledger. The steps, in broad brush, in adding a block to a PoW blockchain are as follows:

• First a buyer purchases an item from a seller with Bitcoin using its private key to sign a message with (a) the number of bitcoins, and (b) the address for delivery.

• The buyer’s transaction message is bundled into a “block” with other transactions.

• The block is broadcast to all listening nodes in the Bitcoin network.

• The network receives unconfirmed transactions, where those nodes that choose to validate the transactions by Proof-of-Work use real world assets to solve a cryptographic puzzle.

• Miners compete to be the first to solve the puzzle to validate the new block for the blockchain.

• The first miner to successfully solve the puzzle that validates the block broadcasts the new block across the network as part of the updated blockchain.

• The “winning” miner receives a reward of newly minted bitcoin.

• The seller receives payment from the buyer, and the buyer receives the bitcoin.

Staking process

To recap, staking is a random selective process to validate new transactions on a blockchain:

• The validator “stakes” its crypto tokens  either directly as a validator, or as a delegate or to a staking pool.

• A protocol algorithm selects a lead validator at random to create a block of transactions.

• The pool of validators verify the block of proposed transactions.

• The network verifies the new block and checks which validators participated correctly and on time.

• The block is added to the blockchain.

• The validator is compensated in “gas” fees and staking rewards

  • “Honest validators” receive rewards credited to the validator (or the staking pool).

  • “Dishonest validators” or validators that are offline excessively have their rewards reduced and their stake (collateral) slashed (forfeited).

• After any required lockup or unbonding period, validators can exit as a validator and withdraw the original stake and rewards by transferring them to a spendable (not locked up) address.

Liquid staking differs from traditional staking in that it allows an investor to earn staking rewards while keeping tokens free to use or trade elsewhere. These “Liquid Staking Tokens” can be traded or even restaked. Some of the protocols in the liquid staking market include Lido, Marinade Finance, Lombard Finance, Solv protocol, Kelp DAO, Jito and Etherfi.[7]

It needs to be clearly stated that this entire field is highly competitive, very lucrative, underregulated, evolving quickly, and changing significantly across protocols, systems and geographies. When miners and stakers are compensated and/or otherwise rewarded for their Proof-of-Work or Proof-of-Stake success, this may come in the form of a newly minted coin, in transaction fees, in rewards, in native asset governance tokens, and likely by many other means of attracting new and existing validators that are being invented now, or yet to be invented.

The means of rewarding miners and stakers are evolving at the speed of competition. What we know is that the ability of miners and stakers to generate income, and the way in which it is taxed, can and will change in tandem. In the short term, let’s move on to what we know, or what we can comfortably expect to see in near-term federal regulation and taxation at the current time of writing.

Core tax principles

A large number of individuals and organizations participate in mining and staking, and there is a lot of confusion about how and when miners and stakers are taxed and how they should be taxed. The brief discussion above only begins to hint at the complexities of Proof-of-Work and Proof-of-Stake ecosystems, staking pools, and node operators associated with the various protocols.

When they are mining and staking, taxpayers are not thinking about taxes, they are thinking about getting rewards for their efforts. How do miners and stakers begin to determine whether they have generated income on their activities, how to handle their expenses, and when do they owe taxes on the income they have earned?

Maybe it’s time to set aside all this complexity for a while, get back to tax basics and look at how gross income is defined under the Internal Revenue Code (Code).[8] Let’s start with a quick look at some 20th century case law that has helped to connect concepts of “income” with those of “wealth,” “dominion,” and “control.”

Our tax laws cast a broad net in their efforts to capture “taxable income.” Code Section 61 defines gross income as income from whatever source derived. Although the Code does not provide taxpayers with prescriptive mechanical tests as to how to determine income, it provides a nonexclusive list of common items that are included in gross income.[9]

To have gross income, a taxpayer must have an “undeniable accession to wealth,” that is “clearly realized” when the item is sufficiently fixed and definite[10] and “over which the taxpayers have complete dominion.”[11] So, taken together, what does this mean? It means that income can be realized in many ways. It can be money, property, services, or liability relief, either directly or constructively.

When we talk about constructive ownership, it is the tax law’s way of looking through layers of ownership or contractual agreements to get at whether the taxpayer can benefit from or control the asset. Constructive ownership rules appear in many places in the tax Code to ensure that tax is paid by those people that have the benefits of ownership, even if they don’t hold title to the asset.[12]

Unless a specific Code provision provides an exclusion from immediate taxation, compensation is taxable when services are performed. For example, let’s look at noncash compensation—such as shares of restricted stock that can be subject to forfeiture or cannot be sold unless and until certain conditions are met. Receipt of noncash compensation is not currently taxable because it is restricted or subject to forfeiture. Code Section 83,[13] however, allow the taxpayer to choose to make an election to pay tax currently on noncash compensation that is not currently taxable because it is subject to restrictions.

Under current law, once the miner or staker—that is, the validator—has both “dominion” and “control” over the rewards and fees, even if they do not transfer the rewards out to a spendable account, the rewards are immediately taxable as ordinary income in the year in which the validator receives them. The rewards represent an undeniable “accession to wealth.” Under current law, when the miner or validator subsequently sells or disposes of the rewards, this is a separate transaction from the initial receipt of the rewards and fees. Upon a subsequent sale or disposition, investors and traders receive capital gain or loss, while dealers and hedgers receive ordinary income or loss. With stakers, there can be a lockup period,[14] when the validator does not have undisputed possession (dominion and control) over the validation rewards and fees until the lockup period lapses.[15] It is at the point when the rewards can actually be accessed—even if the validator does not choose to do so—the validator still has “dominion and control” over them.

The crypto industry argues that validators should not be taxed upon receipt of the rewards but, rather, they should be taxed if or when they subsequently sell or exchange the rewards. The argument for deferral of income that is advanced by those who want Congress to defer tax until the rewards[16] are ultimately sold or disposed of is that validators are creating property—that is, self-created property. They assert that the rewards are not taxable unless and until the rewards are subsequently sold or exchanged.

I believe that “self-created property” is an inapt description of block rewards and transaction fees.[17] The recipients of those rewards are not creating property; their activities are being rewarded by the software of the blockchain protocol. Transaction fees and “gas fees” are blockchain-based payments from other transaction participants. Successful stakers/validators perform a service for which they are being compensated.

If Congress were to enact legislation that miners and stakers do not have taxable income unless and until they dispose of the rewards they received, under current law this would give a tax subsidy to miners and stakers that is not available to any other taxpayers obtaining dominion and control over an asset.

I agree with the following conclusions, many of which have been reached by the IRS already:

• Mining rewards and fees are taxable in the year the taxpayer has actual or constructive dominion and control over the 
  rewards.[18]

• Staking rewards are taxable in the year the taxpayer has actual or constructive dominion and control over the rewards and 
  fees.[19]

• “Gas fees” received by a taxpayer to validate a transaction are taxable in the year the taxpayer receives them (with actual dominion and control over the fees).

• A taxpayer has taxable income as a result of a “hard fork” if the taxpayer receives additional digital asset units. A hard fork might result in the creation of a new digital asset that exists on the new blockchain in addition to the legacy digital asset.[20]

• A taxpayer has taxable income if the taxpayer receives digital asset units in an “airdrop.”[21] Unexpected and unwanted “property” can be airdropped into the taxpayer’s account without the taxpayer’s knowledge or consent. Taxing such airdrops upon receipt seems inappropriate. I believe that taxpayers should have an opportunity to reject such property by disclaiming it or transferring it to a null account.

• If mining and validation activities are services, then rewards and fees are sourced to the residence of the miner or validator.

• Although it is not free from doubt, token holders who delegate their tokens to a validator or staking pool can be passive investors not engaged in a trade or business and do not provide services.

Taxation of wrapped and unwrapped digital assets

Wrapping and unwrapping of digital assets are commonly used in liquid staking models, so they are of direct relevance to this discussion.

Crypto holders take digital assets they own and “wrap” them into another digital asset, and they do this for various reasons. They might wrap tokens so that they are ERC-20 compliant, as is required for many DeFi applications. Wrapping allows the creation of a standardized token. Wrapping also allows holders to interact with lenders, liquidity pools, and to use them as collateral for loans. When a holder wants to return them to the original digital asset, the holder “unwraps” the token. We do not have any government guidance on the taxation of wrapping and unwrapping digital assets. Therefore, our analysis starts with Code Section 1001.

Code Section 1001 focuses on the determination of the amount of and recognition of gain or loss from the sale or exchange of property, including digital assets. Section 1001 provides that gain from selling or disposing of property is equal to the amount realized on its sale or disposition minus the taxpayer’s adjusted tax basis (that is, the original purchase price that the taxpayer paid for the asset plus acquisition costs and capital improvements minus depreciation). Gain or loss on the transaction is the amount recognized unless a statutory exemption applies to defer it.

One important question about Code Section 1001 and wrapping and unwrapping digital assets is whether there is an “exchange of property for other property differing materially either in kind or in extent.”[22]

Guidance is needed with respect to taxing the wrapping and unwrapping of digital assets. To wrap a digital asset means to create a new digital asset and “wrap” an existing digital asset (possibly through a smart contract) in the new tokenized asset so that it can be “unwrapped” and allow the holder to access the digital asset that was originally wrapped. It allows one digital asset to be used on a different blockchain.

For example, a holder of bitcoin might deposit the bitcoin into a smart contract that issues a token that can be used on a different blockchain, or that can be used for a DeFi protocol. The smart contract will redeem the issued token at any time for the underlying deposited Bitcoin. This redemption may or may not be a taxable event, depending on whether the wrapped token is materially different in kind or extent from its unwrapped counterpart.

Arguments can be made that wrapping is taxable and that it is not taxable. The tax answer is likely to turn on what the holder actually receives in the wrapping and unwrapping process. If the holders do not have an “accession to wealth” and basically have no change in their economic positions, there are strong arguments that wrapping and unwrapping is not a taxable event, especially if the wrapped token is fully redeemable and economically equivalent. Arguments can be made, on the other hand, that wrapped tokens have different rights and utilities so that wrapping tokens should be taxable.

Expenses and losses associated with mining and staking

In a Proof-of-Work system, miners compete to solve a cryptographic puzzle in order to validate that the transactions have not been double spent, using real world assets like computers, and peripherals as well as electricity to do so—but all those but the first miner to solve the puzzle do so for no reward or fees. Therefore, the “service” that all miners provide to maintain the integrity of the blockchain typically involves losses and expenses, because most miners do not receive a reward or fees for their services; only the “winner” receives the reward and fees.

In a Proof-of-Stake system, validators will have expenses too but on a much smaller scale than miners, as they pledge a portion of their token holdings as collateral to validate blocks on the blockchain, rather than using up real world assets. If a validator attempts to validate transactions that have already been spent, not only will that block be ignored by the blockchain network, but the validator may also have its pledged tokens slashed, and it might even be banned from the network.

With respect to expenses and losses for mining and validating, miners will typically incur expenses and losses as they attempt to solve the Proof-of-Work math puzzle and receive the mining reward. That activity (the winner and all of the losers) is necessary for the integrity of the blockchain. Stakers, on the other hand, will have expenses but they will not incur losses of the magnitude that miners will incur because Proof-of-Stake is not a race to complete a task first. The validator receives the staking reward, but only “dishonest” validators are subject to losses through slashing and banning, and their activities are attacks on the integrity of the blockchain. The taxation of mining and validating activities should take this difference in losses into account when determining taxable income.

* The firm would like to extend special thanks to Samuel Kramer of Transaction Advisors Group in Chicago for his valuable assistance in the preparation of this article.

[1] Miners and stakers are both blockchain transaction “validators” as this article explains. Readers should be aware, however, that the terms “staker” and “validator” are often used interchangeably in common and technical vernacular, even though the act of staking technically precedes the act of validation in a Proof-of-Stake system. Where possible, I refer to validation as the action that is the ultimate precursor of income, as defined as an undeniable accession to wealth through dominion and control.

[2] “Crypto” has become a generic term that is often used interchangeably with “Digital Assets” in popular vernacular. “Cryptocurrencies” are one category among many classes of digital assets. Digital assets include cryptocurrencies like Bitcoin, stablecoins, security tokens, utility tokens, non-fungible tokens, real world asset tokens, and crypto derivatives/digital asset-based derivatives.

[3] Compiled from https://cryptonewer.com/blog/mining-vs-staking-block-creation-mechanism-key-insights-for-blockchain-enthusiasts/; https://ar.inspiredpencil.com/pictures-2023/bitcoin-mining-diagram; https://www.sec.gov/newsroom/speeches-statements/statement-certain-protocol-staking-activities-052925# ftn5

[4] Subject Matters: Crypto, Part I The Winds of Change, an occasional series by ASKramer Law (Nov 26, 2025).

[5] Blockchain and Distributed Ledger Technology (DLT), Geeks for Geeks, (last updated, Sept. 29, 2025). https://www.geeksforgeeks.org/software-engineering/blockchain-and-distributed-ledger-technology-dlt/

[6] See, Statement on Certain Protocol Staking Activities, SEC, Division of Corporation Finance (May 29, 2025), available at https://www.sec.gov/newsroom/speeches-statements/statement-certain-protocol-staking-activities-052925#_ftn5.

[7] 7 Best Liquid Staking Protocols and Platforms in December 2025, Joel Agbo, Coingape (Dec. 2, 2025), available at https://coingape.com/top-liquid-staking-platforms/.

[8] Unless otherwise indicated, section references are to the Internal Revenue Code of 1986, as amended (the “Code”) or the applicable regulations promulgated pursuant to the Code (the “regulations”).

[9] Code § 61(a).

[10] Eisner v. Macomber 252 U.S. 189 (1920).

[11] Comm’r v. Glenshaw Glass Co., 348 U.S. 426, (1955).

[12] See Treas. Reg. § 1.451-2 - Constructive receipt of income. “(a) General rule. Income although not actually reduced to a taxpayer's possession is constructively received by him in the taxable year during which it is credited to his account, set apart for him, or otherwise made available so that he may draw upon it at any time, or so that he could have drawn upon it during the taxable year if notice of intention to withdraw had been given. However, income is not constructively received if the taxpayer's control of its receipt is subject to substantial limitations or restrictions.“ available at https://www.law.cornell.edu/cfr/text/26/1.451-2

[13] Code § 83 provides an election to have restricted property taxed currently.

[14] See, Statement on Certain Protocol Staking Activities, SEC, Division of Corporation Finance (May 29, 2025), available at https://www.sec.gov/newsroom/speeches-statements/statement-certain-protocol-staking-activities-052925. “Protocol Staking” section: “Covered Crypto Assets are “locked-up” and cannot be transferred for a period of time under the terms of the applicable protocol.[6] The Validator does not take possession or control of staked Covered Crypto Assets, which means that ownership and control of Covered Crypto Assets do not change while they are staked.” And fn 6, “The minimum staking or lock-up period varies among PoS protocols.”

[15] I.R.S., Chief Counsel Advice Memorandum number 202444009, fn 4 (Nov. 1, 2024).

[16] Understanding Ethereum Gas Fees: Their Role and Calculation, Investopedia (updated Aug. 10, 2025), available at https://www.investopedia.com/terms/g/gas-ethereum.asp.

[17] A better analogy might be frequent flyer miles. The “protocol” rewards activities (flights) with newly generated assets (mileage awards).

[18] IRS, FS-2024-12, April 2024. Rev. Rul. 2019-24.

[19] Rev. Rul. 2023-14 (Jul. 31, 2023).

[20] IRS Frequently Asked Questions on Virtual Currency Transactions, Q22. A “hard fork” occurs when a digital asset on a blockchain undergoes a protocol change that results in a permanent diversion (fork) from the legacy or existing blockchain.

[21] IRS Frequently Asked Questions on Virtual Currency Transactions, Q22. An “airdrop” is an amount of digital asset units that are added to the taxpayer’s account on a blockchain as a distribution to multiple taxpayers’ distributed ledger addresses.

[22] See Treas. Reg. § 1.1001-(a).