What Is Staking Crypto?

Zac McClure
ByZac McClure, MBAReviewed byAlex MilesUpdated on October 29, 2024 · minute read
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  • Crypto staking involves locking up tokens to validate blockchain transactions in exchange for rewards. It’s a way to earn passive income without selling crypto.

  • Staking rewards are taxed as income, and any future gains when you sell are subject to capital gains tax.

What is staking crypto

Staking crypto refers to locking up cryptocurrency tokens to support the operations of a blockchain network. When you stake your tokens, they help validate transactions on the network and secure the blockchain. In exchange, you receive staking rewards, typically a percentage of your staked tokens.

This process is primarily associated with Proof of Stake (PoS) cryptocurrencies like Ethereum, Solana, and Cardano. Staking allows you to earn rewards over time without selling your tokens. It's similar to earning interest on a savings account but within the crypto ecosystem.

Is staking crypto worth it

Whether staking is worth it depends on your investment goals and risk tolerance. Staking offers the advantage of earning passive income on cryptocurrency holdings, which can be particularly appealing for long-term investors who plan to hold their tokens anyway. By staking, you help secure the network while generating returns.

Ty Gaines' expert take

“At TokenTax, we’ve helped many clients who are surprised by the tax complexities of crypto staking. From staking rewards being taxed as income to the challenges of reporting when you sell those tokens later, the tax situation can get complicated fast. We work with clients to ensure they’re fully compliant while minimizing their tax burden. Whether you’re staking on multiple platforms or dealing with large-scale staking rewards, having detailed records and expert guidance is key to avoiding mistakes and staying ahead of IRS regulations.”

— Ty Gaines, EA, Tax Expert at TokenTax

However, staking also comes with risks. Some tokens may require a lock-up period, meaning you can’t access your assets during this time, even if the market shifts. There's also the chance of slashing, where part of your staked funds may be lost if the network determines improper behavior.

What’s the difference between mining and staking

Crypto mining and staking serve similar purposes in a blockchain network but operate differently. Mining is typically associated with Proof of Work (PoW) blockchains like Bitcoin, where miners use computational power to solve complex problems and validate transactions.

Staking, on the other hand, relies on token holders to validate transactions in Proof of Stake (PoS) networks.

Proof of work vs proof of stake

Proof of Work requires massive amounts of energy and hardware resources to mine blocks, whereas Proof of Stake requires participants to lock up their tokens as collateral to validate transactions. PoS is often seen as more environmentally friendly and scalable, especially for complex networks like Ethereum after its transition to PoS.

Learn more about Ethereum history.

How does staking crypto work

When you stake crypto, you’re essentially locking up your tokens to contribute to the security of a PoS blockchain. In return, you receive rewards over time, often as additional tokens. Your staked tokens remain in your wallet but are temporarily unavailable for transactions during the staking period.

Different platforms offer various staking mechanisms. For instance, you can stake directly through a crypto wallet or an exchange like Coinbase or Kraken. These platforms make it easier for users by pooling assets, which allows smaller holders to participate in staking without running a full node.

Can you make money by staking crypto

Yes, staking can generate a passive income stream, but the amount you earn depends on the cryptocurrency, the staking platform, and the duration of the staking period. Many platforms offer annual percentage yields (APYs) ranging from 4% to 12%, depending on the token and network activity.

The key to maximizing earnings is choosing a reliable staking platform and understanding the lock-up requirements. While staking can be profitable, crypto prices are volatile, so there’s always a risk that the value of your staked tokens could drop.

Risks and benefits of crypto staking

Staking offers several benefits, including the opportunity to earn passive income and contribute to the security of blockchain networks. It’s especially attractive for long-term holders who want to use their assets rather than sitting idle in a wallet.

However, there are risks to consider. Staking often involves a lock-up period where you cannot trade or withdraw your tokens. There’s also the potential for slashing if your validator misbehaves. Additionally, staking rewards are not guaranteed—returns vary depending on network performance and other factors.

Staking platforms we suggest

Popular platforms include Coinbase, Kraken, and Binance, each offering different APY rates and lock-up periods. Be sure to do your own research to identify a platform that aligns with your goals, and know the risks involved before staking crypto.

See our expert picks of the best crypto staking platforms.

Tax implications for crypto staking

The IRS considers staking rewards taxable income, meaning US taxpayers must report them when they file taxes. The value of the rewards at the time you receive them is subject to ordinary income tax. If you later sell the staked tokens for a profit, those gains are subject to capital gains tax.

Learn more about crypto staking taxes.

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Zac McClure
Zac McClureCo-Founder & CEO at TokenTax
Zac co-founded TokenTax after his career in international finance and accounting at JPMorgan, Imprint Capital and Bain. He has worked in more than half-dozen countries and received his MBA from the UPenn Wharton School.
Alex Miles
Reviewed byAlex MilesCo-Founder at TokenTax
Prior to TokenTax, Alex worked as a Product Designer at Dropbox and before that Readmill (acquired by Dropbox). He holds a BS in Digital Information Design - Interactive Media from Winthrop University.

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