The Internal Revenue Service has provided a safe harbor for certain kinds of trusts enabling them to stake their digital assets without jeopardizing their tax status as investment trusts and grantor trusts for federal income tax purposes.
Revenue Procedure 2025-31 describes the safe harbor, but offers a limited time period for an existing trust to amend its governing instrument to adopt the necessary requirements.
Staking is a way to lock digital assets to a particular blockchain network to earn rewards or interest. Proof-of-stake is a type of consensus mechanism in which validator node operators commit or “stake” digital assets to become eligible to be selected by the relevant protocol to validate a new block of data to, and update the state of, the network’s blockchain. While they’re staked, digital assets are “locked up” and cannot be transferred for a period of time under the terms of the protocol. Some protocols use specific criteria for selecting validators, such as the number of digital assets staked by the validator node operator.
Digital asset owners can participate in staking in various forms, such as custodial staking, in which a third party known as the custodian takes custody of the owner’s digital assets and facilitates the staking of such digital assets on behalf of the owner. The custodian focuses on securely holding, storing, and safeguarding digital assets on behalf of digital asset owners. The custodian, acting on behalf of the owner, selects and enters into contractual arrangements with one or more validator node operators who engage in proof-of-stake activities for digital asset blockchains. In some cases, the legal entity that is the custodian also can act as the staking provider.
The Treasury Department and the IRS have received requests for guidance on whether staking prevents a legal entity formed as a trust under state law from qualifying for federal income tax purposes as an investment trust under Section 301.7701-4(c) of the Tax Code and as a grantor trust; and if not, whether an existing trust agreement may be amended to authorize the staking of some or all of its digital assets without impairing qualification of the trust as an investment trust and as a grantor trust.
“Now with Rev. Proc. 2025-31, an investment trust that is a grantor trust can stake assets and earn staking income,” wrote Jessalyn Dean, senior policy advisor of U.S. tax reporting at Ledgible, a crypto tax and accounting software company in a LinkedIn post. “Previously, earning staking income inside of a grantor trust would have caused it to lose its tax status as a grantor trust.”
Dean noted that Rev. Proc. 2025-31 doesn’t have any effect on Subchapter M Registered Investment Company status. To benefit from the new revenue procedure, exchange-traded products that want to stake relevant crypto assets will need to comply with a number of requirements, including some significant updates to their agreements and prospectus, she noted.
“Staking must be directed through a custodian, though more analysis is needed as to whether the staking provider must be unrelated to the custodian,” she wrote. “The trust’s digital assets must be indemnified from slashing due to the activities of the staking providers. Staking rewards must be distributed quarterly to investors in-kind or as cash. Existing trusts have nine months beginning on Nov. 10, 2025 to amend their agreements to maintain their grantor trust status when offering staking activities to investors.”
However, she pointed out that Rev. Proc. 2025-31 doesn’t specify how tax information reporting requirements are affected.
“The Rev. Proc. only addresses the status of the ETP as a grantor trust,” Dean wrote. “Because the Rev. Proc. requires distributions to investors, which was never a ‘thing’ in other similar structures (like commodity gold ETFs structured as grantor trusts), then this leaves open issues with tax withholding and Form 1099/1042-S reporting to US and non-US investors.”
Unaddressed complications can arise from distributing staking reward income as cash, including questions about their source and character, she noted. “There will also be incremental tax liability to investors who first have a taxable event from earning staking income but then potentially have a gain/loss to account for due to timing differences between the staking income value and the assets sold by the fund to pay out the distributions,” she added.
“Investors that are steering away from holding crypto directly and choose ETPs instead should talk to their investment and tax advisors to weigh the pros and cons of available options,” Dean wrote in a follow-up post. Each comes with its own tax efficiencies and tax compliance complications, with varied expense ratios to operate these funds.”
