crypto tax news staking rewards Aug 06, 2026

Paschall v. Commissioner: Tax Court Rules Crypto Staking Rewards Are Taxable upon Receipt

By Clinton Donnelly, LLM, EA | CEO & Founder, CryptoTaxAudit

A Cardano holder reported his staking rewards as taxable only when he sold them. The IRS said they were taxable the day they hit his account. He took the dispute to the U.S. Tax Court, represented himself against five IRS attorneys, and lost.

That case is Paschall v. Commissioner, T.C. Memo. 2026-46, decided in June 2026. It is the first time the Tax Court has ruled on the merits whether proof-of-stake rewards are taxable when received. The court said yes.

The decision is non-binding, but it is the clearest signal yet of how the court reads the timing question. For anyone earning staking rewards, the reasoning matters as much as the result.

Key Takeaways:

The Tax Court held staking rewards are taxable in the year received, not when sold. Alvie and Patricia Paschall argued for deferral until sale and lost on a 2021 Cardano staking position.

The decision rests on IRC Section 61, not Revenue Ruling 2023-14. The court grounded the result in the broad definition of gross income and the dominion and control standard from Glenshaw Glass, and set the revenue ruling argument aside as unnecessary.

Dominion and control turned on one fact: the rewards could be sold for cash at any time. The tokens were credited monthly to a custodial eToro account and were fully liquid. A temporary transfer restriction did not change the result.

This is a memorandum decision, so it is non-binding on other Tax Court judges. A single judge issued it. It is persuasive, not precedent.

The court rejected the self-created property argument. The parties stipulated the taxpayer did not create the new tokens, so the comparison to a baker or writer taxed only at sale did not apply.

The dispute was a $24,599 deficiency on $33,354 of unreported rewards. The taxpayer carried the case himself, pro se, against five IRS attorneys.

What Did the Tax Court Decide in Paschall?

The U.S. Tax Court held that cryptocurrency staking rewards are taxable in the year the taxpayer receives them, valued at fair market value at that time. The taxpayer reported the opposite and was found to have unreported income.

During 2021, Mr. Paschall held Cardano on eToro, which staked customers' ADA by default and credited rewards monthly as additional tokens. He never opted out. The reward tokens were indistinguishable from his other holdings, and he could sell any of them for cash at any time. He never received a 2021 Form 1099-MISC from eToro and only learned of the income after the IRS adjusted his return in 2023.

He petitioned the Tax Court and argued the case himself, a route lawyers call pro se. He faced five IRS attorneys. The IRS asserted a deficiency of $24,599 on $33,354 of unreported staking rewards. The judge ruled against him.

Why Dominion and Control Decided the Case

Paschall lost because he had dominion and control over the rewards the moment they were credited to his account. The test for income under Section 61 is whether the taxpayer has an accession to wealth that is clearly realized and within their control. The court found he did.

The deciding fact was liquidity. The rewards landed in his eToro account monthly and he could convert them to cash at any time. Under long-standing Supreme Court authority, the power to dispose of income is treated as the equivalent of owning it. He did not have to sell for the income to be his.

He argued he lacked control because eToro restricted transfers to outside wallets after announcing it would delist Cardano. The court rejected that. He could still sell the tokens for cash throughout the restriction, so a limit on moving them off the platform did not undo his accession to wealth.

What Is a Tax Court Memorandum Decision?

A Tax Court memorandum decision is issued by a single judge and is not binding on the other judges of the U.S. Tax Court. It reflects that one judge's reasoning on the facts in front of them.

The court reserves its fully reviewed, court-wide opinions for cases it considers more significant. In those, the judges deliberate together and the result carries broader weight. A memorandum decision does not.

That matters here. Paschall is persuasive, not controlling. Another judge facing different facts, or a taxpayer who develops a stronger record, is free to reach a different result. Related disputes are already moving, including Jarrett v. United States and Rogovy v. Commissioner, which could produce different reasoning.

Where Does Revenue Ruling 2023-14 Fit?

Revenue Ruling 2023-14 is the IRS position on staking. It states that staking rewards are included in gross income in the year the taxpayer gains dominion and control over them, valued at fair market value at receipt.

Paschall reached a result consistent with that ruling but did not rely on it. The court grounded its holding in Section 61 and the Supreme Court's definition of gross income in Glenshaw Glass, which sweeps in all accessions to wealth over which the taxpayer has complete dominion. The court treated the revenue ruling argument as unnecessary and set it aside.

The practical point is that both roads lead to the same place. The IRS position and the court's reasoning both put the tax event at receipt, at fair market value, once the taxpayer has control.

Why the Self-Created Property Argument Failed

The taxpayer argued his rewards were self-created property, taxable only when sold, like a cake a baker is taxed on at sale rather than when it leaves the oven, or a book taxed when it sells. The court rejected the comparison.

The parties stipulated that Mr. Paschall did not create the new tokens. On that record, the court found stakers do not personally manufacture the asset. They participate in a protocol-driven process, which is not the same as a baker or writer producing a good by their own labor.

The court also rejected a comparison to a tax-free stock dividend under Eisner v. Macomber. A pro rata stock dividend leaves a shareholder's proportionate ownership unchanged. The staking rewards increased Paschall's proportionate share of outstanding Cardano and added to the value of his interest, which made them a taxable accession to wealth.

What Paschall Means for Crypto Stakers

If you earn staking rewards on a custodial platform where the tokens are liquid and sellable on demand, Paschall is direct guidance. Report the rewards as income when they are credited, at fair market value, even if you never sell during the year. The liquidity that makes the rewards easy to use is the same liquidity that makes them taxable on receipt.

The decision is also narrow in a way worth noting. The court repeatedly flagged that its analysis was limited by the absence of expert testimony on how the staking process works. It decided the facts in front of it, custodial staking with full liquidity, and did not resolve every staking arrangement. A taxpayer with different mechanics and a developed record could present a different case.

Either way, the exposure shows up the same way Paschall's did, through an IRS adjustment built from third-party reporting the taxpayer may never have seen. CryptoTaxAudit has represented crypto traders in U.S. Tax Court and prepares the kind of crypto gain calculations that hold up when the IRS questions staking income. For ongoing IRS account monitoring and audit defense, TaxShield membership flags adjustments like the one Paschall never saw coming.

Watch Clinton Donnelly's Paschall Staking Tax Breakdown

This article is based on Clinton Donnelly's video breakdown of Paschall v. Commissioner, the Tax Court's staking reward decision, and what it means for crypto investors earning staking income.

Watch Clinton Donnelly explain why the Tax Court treated staking rewards as taxable when received, and what the Paschall decision means for crypto stakers.

Frequently Asked Questions About the Paschall Staking Decision

These are the key questions crypto stakers are asking after Paschall v. Commissioner, especially around staking rewards, dominion and control, IRS notices, and whether the ruling applies beyond this case.

Q: Are crypto staking rewards taxed when I receive them or when I sell them?

A: Under Paschall v. Commissioner and IRS Revenue Ruling 2023-14, staking rewards are income when you gain dominion and control over them, at fair market value at that time. In Paschall, that meant the month the rewards were credited to his account, because he could sell them for cash at any time.

Q: Is Paschall binding on other taxpayers?

A: No. It is a memorandum decision from a single judge, so it is persuasive but not binding precedent. Related cases such as Jarrett v. United States and Rogovy v. Commissioner could still produce different reasoning, and an appeal is possible.

Q: Why did the taxpayer lose his dominion and control argument?

A: He claimed eToro's transfer restrictions meant he did not control the tokens. The court rejected this because he could still sell them for cash at any time, and the ability to dispose of income is treated as ownership of it. The restriction only blocked moving tokens to outside wallets.

Q: Did the court rely on Revenue Ruling 2023-14?

A: No. The court reached a result consistent with the ruling but grounded its holding in Section 61 and Glenshaw Glass. It treated the revenue ruling argument as unnecessary and set it aside.

Q: Can I argue my staking rewards are self-created property?

A: The Tax Court rejected that argument in Paschall. The parties stipulated the taxpayer did not create the tokens, and the court found stakers participate in a protocol-driven process rather than manufacturing an asset, so the baker and writer comparison did not apply.

Q: I got an IRS notice about unreported staking rewards. What should I do first?

A: Gather the records of when each reward was credited and its fair market value at that time, and check how your exchange reported the activity. Paschall's adjustment came from a 1099-MISC he never received, so confirm what the IRS is working from. An enrolled agent can then assess whether the figure is correct and what position is defensible.

Q: Need help reporting or defending crypto staking income?

A: CryptoTaxAudit specializes in crypto tax preparation and IRS audit defense, including staking income and Tax Court representation. Book a consultation to review your staking history and your options.

About CryptoTaxAudit: Founded in 2015 by Clinton Donnelly (LLM, EA), CryptoTaxAudit specializes exclusively in cryptocurrency tax preparation and IRS audit defense. Clinton holds an advanced law degree in international financial planning, federal Enrolled Agent status, and the Certified Cryptoasset Anti-Financial Crime Specialist credential from ACAMS. The firm has filed more than 5,000 crypto tax returns, defended clients in over 50 IRS audits, and represented crypto traders in U.S. Tax Court, including disputes over how digital asset income is timed and valued.