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Key takeaways
- Staking means committing tokens to help secure a proof-of-stake network in exchange for rewards; it is network security work, not a savings account.
- Exchange, native and liquid staking trade convenience against control in different ways, and each carries risks such as slashing, unbonding delays, custody and smart-contract failure.
- The IRS treats staking rewards as income when you gain control of them (Rev. Rul. 2023-14), and in 2025 and 2026 the SEC said protocol staking does not by itself involve a securities offering.
Staking is locking up crypto to help run a proof-of-stake blockchain, and earning rewards for doing it. It can be a useful way to put long-term holdings to work, but rewards are never guaranteed, and how you stake changes your risks, your access to your coins and your taxes.
Proof of stake in plain English
Every blockchain needs a way for thousands of independent computers to agree on which transactions are valid. Bitcoin uses proof of work, where miners spend electricity to compete. Networks such as Ethereum, Solana and Cardano use proof of stake instead.
In proof of stake, participants put up the network's own token as a security deposit. The protocol picks among them to propose and confirm new blocks. Honest work earns rewards; provably dishonest behavior can cost part of the deposit. The idea is simple: people with something to lose have a reason to play by the rules.
Validators and delegating
A validator is a node that stakes tokens and does the work of checking and adding blocks. Running one takes technical skill, reliable hardware and an always-on connection. On Ethereum, for example, running your own validator requires 32 ETH.
Most people do not run validators. Instead they delegate: they assign their staking power to a validator operator, who shares the rewards after taking a commission. On many networks, such as Cardano, delegation is built into the protocol and your coins never leave your wallet. On others, delegation happens through a pool or a service.
The SEC's May 2025 staff statement described these same three broad models: solo staking, self-custodial staking with a third-party operator, and custodial staking through a platform.
Exchange vs native vs liquid staking
| Method | Who holds the keys | Main trade-off |
|---|---|---|
| Exchange (custodial) staking | The platform | Easiest to use, but you depend on the company's solvency and terms, and it keeps a share of rewards |
| Native staking or delegation | You | More control and often a larger share of rewards, but you must manage your wallet and pick a validator |
| Liquid staking | A smart contract or provider | You receive a tradable receipt token, but add smart-contract risk and the chance the receipt trades below the underlying asset |
Liquid staking deserves extra explanation. You deposit tokens with a protocol and get back a “receipt” token representing your stake and its rewards. You can use that receipt in DeFi or sell it instead of waiting to unstake. Each extra layer, though, is another place something can break.
Rewards: APR vs APY
Staking rewards usually come from two places: newly issued tokens and a share of the network's transaction fees. Because new issuance increases total supply, part of what looks like a reward simply offsets dilution for people who do not stake.
Platforms quote returns in two ways:
- APR (annual percentage rate) is the simple yearly rate with no compounding.
- APY (annual percentage yield) assumes rewards are added back to your stake and earn more rewards. It is higher than APR for the same base rate, but only if your rewards really are restaked.
Rates change with network conditions and are paid in tokens, not dollars. Try different scenarios in our staking calculator.
Lockups and unbonding
Many networks impose waiting periods. A bonding period can delay when rewards start, and an unbonding period can delay when you get your tokens back after you ask to unstake. The SEC staff noted these can last hours, days or weeks depending on the protocol. On Ethereum, exit and withdrawal times depend on how many validators are waiting in the queue.
During unbonding you usually earn nothing and cannot sell. If the price drops in that window, you simply have to wait. Exchanges may offer faster exits, but they are fronting you liquidity under their own terms.
Slashing and other risks
Slashing is the penalty a network applies when a validator breaks critical rules, such as signing two conflicting blocks. Part of the stake is destroyed, and the validator may be removed. Smaller penalties can apply for being offline. If you delegate to a validator that is slashed, some networks pass the loss on to delegators.
Other risks to weigh:
- Price risk: rewards paid in a token that falls can still leave you behind in dollar terms.
- Custody risk: with exchange staking, your coins are exposed to that company's failure.
- Smart-contract risk: liquid staking protocols can be exploited.
- Concentration risk: when a few providers control a large share of stake, the network becomes less decentralized.
US tax treatment of staking rewards
In July 2023 the IRS issued Revenue Ruling 2023-14. It says a cash-method taxpayer who receives staking rewards must include their fair market value in gross income in the year the taxpayer gains “dominion and control” over them, meaning the ability to sell, exchange or otherwise dispose of them. The ruling applies whether you stake directly or through an exchange. When you later sell, you may have a capital gain or loss measured from that value.
Later developments, as of October 2026:
- In Paschall v. Commissioner, T.C. Memo. 2026-46, the Tax Court held that staking rewards credited to a taxpayer's exchange account were income when received, according to an EY summary. The court rested its decision on general income principles rather than the ruling, and as a memorandum opinion its precedential weight is limited.
- A separate refund case, Jarrett v. United States, argues that rewards a taxpayer earns by validating with his own tokens are self-created property taxed only on sale. The government refunded the tax in the first round without addressing that argument, and the taxpayer filed a second suit for a later year in October 2024. The Tax Court in Paschall rejected the same self-created-property analogy, so check the case status before relying on it.
- In November 2025 the IRS released Rev. Proc. 2025-31, a safe harbor allowing certain exchange-traded crypto trusts to stake without losing their tax status. It does not change how individuals are taxed.
- Congress has considered proposals, including a draft bill circulated in 2026, that would defer tax on staking rewards until they are sold. Check the current status before relying on any change.
See our crypto tax guide, and consider a tax professional if you stake meaningful amounts.
The SEC's view of protocol staking
On May 29, 2025, the SEC's Division of Corporation Finance issued a staff statement saying that protocol staking, including solo, delegated and certain custodial arrangements, generally does not involve the offer and sale of securities. On August 5, 2025, it issued a similar statement on liquid staking, with the caveat that conclusions depend on the facts. Staff statements are not formal rules, and Commissioner Caroline Crenshaw publicly criticized the liquid staking statement.
On March 17, 2026, the full Commission, joined by the CFTC, adopted an interpretation stating that protocol staking does not involve the offer and sale of a security. The 2025 staff statement made clear that its views did not extend to arrangements where a custodian decides whether, when or how much of your crypto to stake, and any product promising fixed or guaranteed returns deserves extra scrutiny. More on the rules in our laws and regulations hub.
Where to go next
This lesson follows buying crypto safely, sending crypto safely and what DeFi is. Next, see how layer 2 networks scale Ethereum, then finish this stage with stablecoins.
Frequently asked questions
Is staking the same as earning interest?
No. Interest is paid by a borrower. Staking rewards come from the network itself, usually newly issued tokens plus a share of transaction fees, in return for helping validate blocks. Rewards are paid in the staked token, so their dollar value moves with its price.
Can I lose money staking?
Yes. The token's price can fall by more than the rewards you earn, validators can be penalized through slashing, and custodians or liquid staking contracts can fail. You may also be unable to sell during an unbonding period.
Are staking rewards taxed when I receive them or when I sell?
Under Rev. Rul. 2023-14, the IRS says rewards are ordinary income at their fair market value when you gain dominion and control over them, and the Tax Court agreed in a 2026 memorandum decision. Selling later can create a separate capital gain or loss. Talk to a tax professional about your situation.
What is the difference between APR and APY in staking?
APR is the simple annual rate without compounding. APY assumes your rewards are restaked and keep earning, so it is higher for the same underlying rate, but only if compounding actually happens.
Sources
- Rev. Rul. 2023-14 — Internal Revenue Service
- Tax Court confirms staking rewards are taxable upon receipt — EY Tax News
- Statement on Certain Protocol Staking Activities — U.S. Securities and Exchange Commission
- Division of Corporation Finance Issues Staff Statement on Certain Liquid Staking Activities — U.S. Securities and Exchange Commission
- SEC Clarifies the Application of Federal Securities Laws to Crypto Assets — U.S. Securities and Exchange Commission
- Ethereum staking: How does it work? — ethereum.org
Updated October 4, 2026 by The Crypto Guide editorial team. Educational content, not financial, legal or tax advice. Spot an error? Request a correction.