Paschall v. Commissioner, T.C. Memo. 2026-46: Tax Court Holds Cryptocurrency Staking Rewards Taxable as Gross Income Upon Receipt

Paschall v. Commissioner, T.C. Memo. 2026-46: Tax Court Holds Cryptocurrency Staking Rewards Taxable as Gross Income Upon Receipt

On June 4, 2026, the United States Tax Court issued its memorandum opinion in Paschall v. Commissioner, T.C. Memo. 2026-46, a case that delivers clear guidance on one of the most pressing questions in cryptocurrency taxation: when are staking rewards includible in gross income? The court held that rewards received from staking Cardano tokens on the eToro platform were taxable under I.R.C. § 61 in the year they were credited to the taxpayers' account — not deferred until the tokens were sold or exchanged. This ruling has significant implications for the growing number of investors participating in proof-of-stake networks and reinforces the IRS's broad authority to tax accessions to wealth. Taxpayers facing similar issues should review our Tax Court practice overview to understand how these disputes are litigated.

Who Were the Paschalls and What Did They Do?

Alvie N. Paschall and his wife Patricia C. Paschall, appearing pro se before the Tax Court, maintained an account with eToro USA, LLC in which they held Cardano (ADA) tokens during the 2021 tax year. eToro offered a staking service for proof-of-stake cryptocurrencies, and Mr. Paschall's tokens were staked through the platform for the entirety of 2021. Although customers could opt out of staking, the Paschalls did not do so. As a result, additional Cardano tokens were credited to Mr. Paschall's account on a monthly basis as staking rewards. These rewards were indistinguishable from his existing token holdings. While eToro had imposed temporary restrictions on transferring the tokens to external wallets or platforms (due to an anticipated delisting of Cardano), Mr. Paschall retained the ability to sell the tokens for cash directly on the eToro platform at any time. The IRS received information reporting via Form 1099-MISC showing $33,354 in staking rewards, which the Paschalls did not report on their 2021 federal income tax return. This omission led to a Notice of Deficiency and the subsequent Tax Court petition.

The Issues Before the Court

The central issue was the proper timing of income inclusion for cryptocurrency staking rewards under the Internal Revenue Code. Specifically, the court had to determine whether the rewards constituted gross income under section 61 when they were credited to the account (with an ascertainable fair market value), or whether taxation could be deferred until the taxpayers later sold, exchanged, or otherwise realized the rewards. The deficiency determination rested on the IRS's conclusion that the fair market value of the rewards was includible in 2021. The Paschalls challenged this conclusion, raising arguments about dominion and control, analogies to nontaxable stock dividends, and the character of the rewards as self-created property. For taxpayers dealing with IRS challenges to crypto reporting, our IRS audit representation services provide the expertise needed to build a strong factual and legal record.

The IRS's Position

The IRS maintained that the staking rewards were clearly gross income under the expansive definition contained in I.R.C. § 61. Relying on the Supreme Court's landmark decision in Commissioner v. Glenshaw Glass Co., 348 U.S. 426 (1955), the government argued that gross income includes all accessions to wealth that are realized and over which the taxpayer has complete dominion and control. The rewards represented a tangible increase in the Paschalls' wealth — additional tokens with a readily ascertainable fair market value of approximately $33,354. The IRS further contended that the taxpayers' ability to sell the tokens for cash on the eToro platform demonstrated the requisite dominion and control, regardless of any temporary transfer restrictions to external wallets. The government also rejected any suggestion that the rewards were not "realized" because they were the product of a blockchain protocol rather than the taxpayers' direct personal efforts.

The Taxpayers' Arguments

Representing themselves, the Paschalls advanced three primary legal theories in an attempt to avoid immediate taxation of the staking rewards:

• Lack of dominion and control: They argued that because eToro restricted the ability to transfer the reward tokens to external platforms or wallets, they lacked full ownership or the freedom to enjoy the property without restriction.
• Stock dividend analogy: They contended that the rewards were analogous to nontaxable pro rata stock dividends under the Supreme Court's decision in Eisner v. Macomber, 252 U.S. 189 (1920), representing merely an increase in the value of their existing holdings rather than a taxable distribution of new property.
• Self-created property theory: They posited that staking rewards, like a product created through personal labor and capital (such as a baker's cake or a writer's book), should only be subject to tax upon realization through sale or exchange, not upon the protocol-driven crediting of the tokens.

How the Court Ruled and Why

The Tax Court ruled in favor of the IRS, holding that the staking rewards were includible in the Paschalls' gross income under section 61 in the year of receipt. The court methodically addressed and rejected each of the taxpayers' arguments, grounding its decision in established precedent rather than any novel cryptocurrency-specific rules.

Regarding dominion and control, the court reiterated that the power to dispose of income is the equivalent of ownership of it, citing Helvering v. Horst, 311 U.S. 112, 118 (1940). Because Mr. Paschall could convert the reward tokens into cash at any time through sales on the eToro platform, he possessed complete dominion over the economic value of the rewards. The temporary restriction on external transfers did not negate this control or prevent realization of the income. The court found that the ability to enjoy the wealth at the taxpayer's option was sufficient to trigger inclusion under § 61.

The court also rejected the stock dividend analogy. Unlike a true stock dividend, which "really take[s] nothing from the property of the corporation and add[s] nothing to that of the shareholder" (Eisner v. Macomber), the Cardano staking rewards increased the overall supply and aggregate value of Cardano tokens in circulation. This created a genuine accession to the taxpayers' wealth, not merely a paper recharacterization of existing value.

Finally, the self-created property argument was dismissed because the Paschalls did not personally create or manufacture the new tokens. The rewards were granted by the underlying cryptocurrency protocol in exchange for the staking service. The taxpayers were participants in the network, not the owners or operators of the staking mechanism itself. Therefore, the rewards were not "self-created" in the sense that would support deferral of taxation until disposition.

The decision underscores that the fundamental principles of gross income under § 61 apply with full force to cryptocurrency staking arrangements, and that the timing of inclusion turns on when the taxpayer obtains the ability to exercise dominion and control over the economic benefit.

What This Means for You

Staking Rewards Are Generally Taxable When Credited If You Can Access Their Value

If you hold cryptocurrency that earns staking rewards and those rewards are credited to an account from which you have the practical ability to sell or convert to cash, the Tax Court has now confirmed they are includible in gross income under § 61 in the year of receipt. Deferral arguments based on platform restrictions or the "self-created" nature of the rewards are unlikely to succeed. Taxpayers should report the fair market value of rewards on the date they are credited, using reliable pricing data. Our ongoing analysis of Tax Court decisions highlights these emerging issues for crypto investors.

Third-Party Reporting Makes Omission Risky

Platforms issuing Forms 1099-MISC or equivalent reporting for staking rewards give the IRS direct information about unreported income. Taxpayers who fail to include these amounts on their returns not only face the underlying deficiency but also risk accuracy-related penalties under I.R.C. § 6662 unless they can establish reasonable cause and good faith. If you are under examination or have received a notice involving cryptocurrency income, experienced IRS audit representation can help you develop the documentation and arguments necessary to resolve the matter favorably.

Maintain Detailed Records of Receipt Date and Fair Market Value

For any staking activity, create contemporaneous records showing the exact date rewards were credited and the fair market value on that date. This documentation is essential for accurate reporting and for defending your position if the IRS issues a Notice of Deficiency. If you are already facing collection or audit issues related to crypto, our full range of IRS resolution services — including penalty abatement, installment agreements, and Offers in Compromise — can be deployed to protect your interests.

Professional Counsel Matters in Developing Areas of Tax Law

The Paschalls appeared pro se and advanced creative arguments that the court ultimately rejected. In rapidly evolving areas like cryptocurrency taxation, where the IRS is actively issuing guidance and examining returns, the assistance of qualified tax counsel can significantly improve outcomes. Whether you are responding to an audit, preparing to petition the Tax Court, or seeking to resolve an existing deficiency, early engagement with professionals who understand both the technical issues and the Tax Court's procedures is critical.

Get a Consultation Before the Clock Runs Out

If you received a Notice of Deficiency, you have only 90 days to petition the Tax Court — contact Brightside Tax Relief for a consultation before that deadline expires. Call 914-214-9127 or visit brightsidetaxrelief.com/tax-court to speak with our team today.