Every staking position in an open tax year now starts with one question: which kind of staker were you? The Tax Court’s decision in Paschall v. Commissioner, T.C. Memo. 2026-46 is the first time a court has reached the merits of whether proof-of-stake rewards are taxable when received, and the headline is being read as “the IRS won, staking is income.” That reading is correct but incomplete. The court answered the question for one fact pattern: a taxpayer who let a custodial exchange stake his tokens for him. It did not answer it for the taxpayer who runs a validator, delegates to one, or holds a liquid-staking token. The gap between what Paschall decided and what it expressly declined to decide is exactly where a crypto taxpayer’s remaining exposure and remaining defenses now live.
This note walks what the court actually held, why the route it took matters more than the result, the four staking fact patterns and where each sits afterward, and the control sequence to run if you took the non-inclusion position on an open year.
What Paschall held
Alvie and Patricia Paschall held Cardano (ADA) in an account at the exchange eToro. By default, eToro staked customer Cardano unless the customer opted out; the Paschalls never opted out. eToro executed the staking, credited monthly rewards in proportion to tokens held, and kept a fee of 10% to 25% depending on membership tier. The rewards credited to the account during 2021 were stipulated at $33,354.27, rounded elsewhere in the opinion to $33,354, and reported to the IRS on a 2021 Form 1099-MISC. Later in 2021 eToro announced it would delist Cardano and restricted the Paschalls’ ability to move ADA to another wallet, but they could still sell it for cash at any time; in 2022 Mr. Paschall transferred the Cardano to another platform. Mr. Paschall did not own or operate the staking pool.
On those stipulated facts, the court held that the rewards were gross income under IRC §61 in 2021, the year received. The analysis sits on top of the property-classification baseline that governs every digital-asset position (see our note on why Notice 2014-21 still controls); staking is just one transaction type layered on that framework. The reasoning is ordinary income-tax doctrine, not crypto-specific rulemaking: a reward the taxpayer can convert to cash is an “accession to wealth, clearly realized, over which the taxpayer has complete dominion” under Commissioner v. Glenshaw Glass Co. “Dominion and control” is the operative test, and it means the practical power to sell, exchange, or otherwise dispose of the asset. The court rejected three taxpayer arguments:
- The transfer restriction did not defeat income. The Paschalls argued that because eToro had frozen transfers of ADA to outside wallets, they lacked control. The court disagreed: the ability to sell the tokens for cash was sufficient dominion and control even though wallet-to-wallet transfer was blocked.
- The stock-dividend analogy failed. The Paschalls invoked Eisner v. Macomber, where a pro-rata stock dividend was not income because it did not change the shareholder’s proportionate interest. The court found that staking rewards did change Mr. Paschall’s position, because not every Cardano holder received them; only those who staked did, so his proportionate interest grew relative to holders who did not.
- The self-created-property analogy failed. The Paschalls compared the rewards to a baker’s cake or an author’s manuscript, which are taxed on sale, not creation. The court rejected the analogy on these facts: Mr. Paschall did not operate the validator. eToro performed the staking and the protocol issued the tokens, so the court viewed him as receiving a reward, not creating property.
Why the route matters more than the result
The most important move in the opinion is what the court did not lean on. It did not rest on Rev. Rul. 2023-14, the 2023 ruling that says staking rewards are includible at fair market value when the taxpayer gains dominion and control. The Paschalls had argued that the ruling could not apply retroactively and, after Loper Bright Enterprises v. Raimondo ended Chevron deference, should carry little weight. The court sidestepped that whole fight by holding that §61 and long-standing case law decide the question on their own.
That makes the decision harder to wave away. A taxpayer can still argue that a revenue ruling does not bind a court (and Webber v. Commissioner confirms a ruling gets only Skidmore-style persuasive weight). But after Paschall, the IRS no longer needs the ruling for custodial-exchange facts. It can point to a Tax Court opinion applying §61 directly. The debate shifts from “is the ruling valid?” to “did the court apply general income doctrine correctly, and does that doctrine reach my different facts?”
The caveat the headlines skip
Paschall is a Tax Court memorandum decision, which means it is non-precedential and applies settled law to specific facts rather than announcing new law. It was also litigated by the taxpayers pro se, without counsel, on a stipulated record with no expert testimony and no trial. The court itself noted that its analysis would have benefited from further fact-finding. That posture is not a technicality. The proportionate-interest reasoning behind the Macomber rejection turns on contested mechanics: proof-of-stake protocols typically issue rewards through token inflation that dilutes non-stakers, so whether a staker’s economic interest genuinely increases, or merely his nominal token count, is a real question that an expert record could have sharpened. A thinly developed factual record produces a narrow holding. Paschall should be read for what it decided on custodial-exchange facts, not stretched to every proof-of-stake arrangement.
Four kinds of staking, and which one Paschall closed
For tax purposes, “staking” is not one fact pattern. At least four matter, and Paschall speaks directly to only one.
- Custodial / exchange staking. The taxpayer holds tokens on a platform that stakes them and distributes rewards (the Paschall facts). After Paschall, this is the adverse column: rewards are income at receipt when the taxpayer can sell for cash.
- Delegated staking. The taxpayer keeps custody but delegates validation rights to a validator and shares in rewards. This sits between custodial and direct validation; the more the taxpayer documents custody, delegation mechanics, lockup or claim rights, and reward-credit timing, the further it moves from Paschall.
- Direct validation. The taxpayer runs validator infrastructure and participates in block production. This is where the self-created-property argument is strongest and Paschall is weakest, because the court’s analysis rested expressly on Mr. Paschall not operating the pool. The file should preserve validator-node logs, reward-credit timestamps, wallet-control records, protocol rules, slashing or lockup terms, infrastructure costs, and any contemporaneous tax advice; without that record, the argument collapses into slogan rather than proof. At minimum, the validator file should tie each reward batch to the node or validator address, the wallet that first controlled the reward, the protocol state that created it, and the date on which the taxpayer could sell, transfer, claim, or otherwise dispose of the unit.
- Liquid staking. The taxpayer deposits tokens and receives a liquid-staking token (such as a stETH-type receipt) that can itself trade or be used in DeFi. This raises its own realization and basis questions that Paschall never touched.
The practical instruction is to classify the position before pricing the risk. The same taxpayer can hold all four arrangements across different chains and platforms in the same year, with a different answer for each.
What Paschall did not decide
The court was explicit about its limits. Paschall does not decide whether a direct validator on a different protocol can make a stronger self-created-property argument. It does not address the treatment of transaction fees, slashing penalties, lockups, liquid-staking tokens, restaking, or validator business expenses. It does not decide how to source staking income, whether staking rises to a trade or business under the facts, or whether rewards could fall under IRC §83, the partnership rules, or another specialized regime. Each of those is an open question, and several are where a well-advised taxpayer’s planning actually happens.
The cases still in motion
Two other dockets keep this area unsettled. Jarrett v. United States is back: after the 2019-tax-year suit was dismissed as moot when the government simply refunded the tax (Jarrett, 79 F.4th 675 (6th Cir. 2023)), the Jarretts filed a second suit for 2020 (M.D. Tenn., No. 3:24-cv-01209, filed Oct. 10, 2024) that directly challenges Rev. Rul. 2023-14 and advances the newly-created-property theory on direct-validation facts, the column where Paschall is least persuasive. Jarrett II is pending and is the case to watch.
Rogovy v. Commissioner (T.C. Dkt. No. 17513-24) is not a staking case; it concerns whether 2017 to 2018 hard-fork coins were income. The court denied summary judgment because realization and dominion remained genuine factual disputes. Rogovy also delivered a practical lesson worth as much as the tax law: the court granted a protective order allowing redaction of wallet addresses, public and private keys, transaction hashes, and exact quantities, recognizing that tying a named taxpayer to wallet data exposes their entire on-chain history to public tracing. For anyone litigating or amending a crypto position, manage the paper so that proving your numbers does not publish your wallet.
The numbers behind the doctrine
| Item | Figure / rule | Authority |
|---|---|---|
| Staking rewards at issue in Paschall | $33,354.27 stipulated value, rounded elsewhere to $33,354; reported on 2021 Form 1099-MISC | T.C. Memo. 2026-46 |
| eToro staking fee withheld | 10% to 25% by membership tier | T.C. Memo. 2026-46 |
| Jarrett I staking output (2019) | 8,876 Tezos tokens; suit mooted after the government authorized a refund with statutory interest | Jarrett, 79 F.4th 675 (6th Cir. 2023) |
| IRS income-timing position | FMV included at dominion and control; applies to direct and exchange staking | Rev. Rul. 2023-14, 2023-33 I.R.B. 484 |
| Accuracy-related penalty | 20% of the underpayment | IRC §6662(a) |
| “Substantial understatement” trigger (individual) | greater of 10% of tax shown or $5,000 | IRC §6662(d)(1)(A) |
| Reasonable-cause / good-faith relief | penalty abated if the standard is met | IRC §6664(c) |
| Proposed elective deferral (not law) | up to 5 years; proof-of-work miners excluded | Digital Asset PARITY Act discussion draft (May 2026) |
If you took the non-inclusion position: a control sequence
For taxpayers who left staking rewards off an open-year return, the control point is not “amend or defend” in the abstract. It is this sequence.
- Triage the facts. For each year, identify the tokens, the platforms and wallets, and which of the four staking forms applied. Whether rewards were locked, transferable, or sellable, and whether any Form 1099 issued, drives everything downstream.
- Pin the exact return position taken. “No income until sale,” “income only at unlock,” “net of platform fees,” and “inconsistent across exchanges” each carry a different audit and penalty profile. Reliance on the Jarrett refund as if it were precedent is its own exposure, because that suit was dismissed as moot and decided nothing.
- Reconcile information reporting. If a platform issued a 1099-MISC (or a 1099-DA going forward), the IRS can surface the gap through automated matching. Paschall itself began with a 1099-MISC and a CP2000 notice. A form sent to a stale address still creates a matching problem.
- Run the penalty analysis. Test substantial authority, reasonable basis, disclosure on Form 8275, and reasonable cause and good-faith reliance under §6664(c). The honest answer differs before and after Rev. Rul. 2023-14, and differs again after Paschall. A direct validator with contemporaneous documentation and competent advice stands on different ground than a holder who received a platform 1099 and omitted it. This is where professional skepticism about your own position pays off: an aggressive-but-disclosed position is a different risk than a quiet omission.
- Decide each open year deliberately. Amending may cut future exposure but can concede a position you might want to preserve; not amending may keep the legal argument alive but raises the premium on documentation and penalty defense. Clients with pending refund claims, CP2000 notices, exams, or Tax Court petitions should treat Paschall as new authority to address head-on.
Legislation on the horizon
Congress may change this. The bipartisan Digital Asset PARITY Act discussion draft, circulating in spring 2026, would let eligible stakers elect to defer income on rewards for up to five years, recognizing it on sale or use rather than at receipt; the current framing excludes proof-of-work miners. It would also extend wash-sale and securities-lending principles to digital assets. It is a draft, not law, and changes nothing on a return filed today, but it is the proposal most likely to reset the income-timing question if it advances.
Where this leaves you
Paschall did not end the staking debate; it narrowed it. Custodial-exchange staking is now the hard case to defend, and direct validation is where the open question still lives. If rewards were omitted on an open year, start with classification: custodial, delegated, direct validator, or liquid staking. Then reconcile the reward fair market value, basis hand-off, and later sale character, the fair market value taxed at receipt becomes basis for the later disposition, so the ordinary-versus-capital character of each leg has to be tracked. The diagnostic is not whether “staking is taxable” in the abstract. The diagnostic is which column your facts occupy, what records prove that column, and whether the penalty file is strong enough before an automated 1099 match forces the timing.
This note is general information, not tax or legal advice; your facts control.
Authority: Paschall v. Commissioner, T.C. Memo. 2026-46; IRC §61 (gross income); Commissioner v. Glenshaw Glass Co., 348 U.S. 426 (1955); Helvering v. Horst, 311 U.S. 112 (1940); Eisner v. Macomber, 252 U.S. 189 (1920); Webber v. Commissioner, 144 T.C. 324 (2015); Christoffersen v. United States, 749 F.2d 513 (8th Cir. 1984); Rev. Rul. 2023-14, 2023-33 I.R.B. 484 (staking rewards at dominion and control); Loper Bright Enterprises v. Raimondo, 144 S. Ct. 2244 (2024); Jarrett v. United States, 79 F.4th 675 (6th Cir. 2023), and Jarrett v. United States, No. 3:24-cv-01209 (M.D. Tenn. filed Oct. 10, 2024); Rogovy v. Commissioner, T.C. Dkt. No. 17513-24; IRC §83; IRC §6662(a), §6662(d)(1)(A); IRC §6664(c); Form 8275 (disclosure); Notice 2014-21 (virtual currency as property); Digital Asset PARITY Act discussion draft (May 2026).