David Schwartz, former Ripple chief technology officer, has reignited debate over how staking rewards should be taxed if XRP Ledger ever adopts a native staking model. According to reports from crypto.news, Schwartz's comments during a discussion with crypto tax expert Clinton Donnelly focused on whether staking rewards should face tax before a holder sells them. His remarks challenge the current IRS approach that taxes proof-of-stake rewards when taxpayers gain dominion and control over them directly.
Schwartz drew a clear distinction between different types of staking rewards in his tax treatment framework. As reported by crypto.news, he stated that rewards already existing and transferred to users should be treated as taxable income when received. However, rewards created by the same staking process that distributes them should be treated like newly minted property. He compared this to knitting a sweater for sale, arguing there's no tax due until the sweater is actually sold. This framing challenges the broad reading of IRS guidance that treats proof-of-stake rewards as taxable when taxpayers gain control. The distinction matters because XRP holders currently seek yield through third-party exchanges, lending services, liquidity pools, or DeFi systems, which carry platform, smart contract, and market risks.
The discussion does not reflect current XRP Ledger functionality, as reported by crypto.news. XRPL does not use proof-of-stake consensus and holders cannot stake XRP directly on the network in the same manner as users stake tokens on networks such as Ethereum. Currently, XRP holders seek yield through third-party exchanges, lending services, liquidity pools, or DeFi systems, which carry platform, smart contract, and market risks. Schwartz's comments focused on potential future design considerations if the ecosystem were to explore staking-like models, providing the XRP community with a framework for discussing future reward systems and tax treatment before any technical change is proposed.
The IRS issued Revenue Ruling 2023-14 on staking rewards, which requires cash-method taxpayers to include the fair market value of staking rewards in gross income when they gain dominion and control over the tokens. According to crypto.news, this means the agency generally treats proof-of-stake rewards as taxable when taxpayers can sell, exchange, or transfer them. The rule also applies when rewards come through a crypto exchange. Schwartz's argument questions whether this approach fits every protocol design, suggesting rewards paid from existing sources look like compensation, while rewards minted during staking processes may resemble property created by participants. The debate remains unresolved for XRP because the network does not have native staking functionality.
