IRS expands safe harbor allowing crypto trusts to stake digital assets without tax penalties

The U.S. Internal Revenue Service has issued Revenue Procedure 2026-20, updating its tax safe harbor to allow qualifying investment and grantor trusts to stake proof-of-stake digital assets without losing their favorable tax status. To qualify, trusts must meet 14 strict conditions, including SEC disclosures, exchange listings, and holding a single asset type. Staking is treated as passive property conservation, and rewards must be distributed to holders within 60 days of the quarter's end. Existing trusts have six months from October 6, 2026 to comply.

Introduction of Revenue Procedure 2026-20

• ▪Revenue Procedure 2026-20 replaces the previous safe harbor framework established under Revenue Procedure 2025-31, which was introduced in November 2025.
• ▪Existing trusts have a six-month transition period from October 6, 2026 to adopt the revised requirements of Revenue Procedure 2026-20 before they can no longer rely on the 2025 safe harbor.
• ▪The U.S. Internal Revenue Service issued Revenue Procedure 2026-20 on October 6, 2026, updating its tax safe harbor for qualifying investment and grantor trusts that stake proof-of-stake digital assets.

Trust eligibility requirements

• ▪The safe harbor requires trusts to satisfy 14 requirements, restricting eligible trusts to holding cash and units of a single type of digital asset operating on a permissionless proof-of-stake network.
• ▪To qualify for the safe harbor, a trust's interests must trade on a national securities exchange, and its staking disclosures must be filed with the Securities and Exchange Commission.

Custody and staking provider rules

• ▪A trust must be indemnified against slashing losses caused by activities or events reasonably within the staking provider's control or ability to protect against.
• ▪The trust and its sponsor must remain unrelated to the staking provider, and contracts between providers and custodians must be negotiated on arm's-length terms.
• ▪Digital assets must be held by one or more custodians at addresses they control, with only those custodians having access to the associated private keys.

Distribution of staking rewards

• ▪Staking rewards must consist of additional units of the same digital asset held by the trust and must be distributed proportionally to holders based on their interests.
• ▪The IRS requires trusts to distribute staking rewards to holders no later than 60 days after the end of the calendar quarter in which the trust gains control of the rewards.

Tax implications and limitations

• ▪Compliant staking is treated as a property-conservation activity, which prevents it from being classified as active management and preserves the trust's tax status under IRC §§ 671–677.
• ▪The safe harbor guidance is limited to trust classification and does not provide a general tax exemption for staking income or address the tax treatment of forks and airdrops.

Exceptions for unstaked holdings

• ▪Revenue Procedure 2026-20 permits temporary unstaked holdings to maintain a liquidity reserve for exchange redemptions, or when assets are sold to cover trust expenses, cash distributions, or received as staking rewards.
• ▪Revenue Procedure 2026-20 allows trusts to keep some holdings unstaked to protect assets against potential systemic vulnerabilities in network protocols or validator software.

Debatable claims

• ▪The IRS's exchange-listing requirement for the staking safe harbor is too restrictive
• ▪Staking by exchange-traded crypto trusts poses unacceptable liquidity risks to investors
• ▪The IRS should expand its staking safe harbor to include multi-token crypto trusts
• ▪Staking digital assets by investment trusts constitutes active investment management