The U.S. Treasury Department and Internal Revenue Service issued sweeping new guidance allowing crypto exchange-traded products to stake digital assets and distribute staking rewards to retail investors. Treasury Secretary Scott Bessent announced the move would “increase investor benefits, boost innovation, and keeps America the global leader in digital asset and blockchain technology.” The guidance comes two years after the then-SEC Chair Gary Gensler suggested proof-of-stake tokens were securities. The new framework provides tax clarity for staking in ETFs that hold the same proof-of-stake tokens, with the IRS establishing a safe harbor under which crypto ETFs structured as grantor trusts can stake without incurring corporate taxation. Explained: Safe Harbor Requirements According to the IRS, the safe harbor imposes strict operational requirements on crypto ETFs that pursue staking activities. Funds must stake through unrelated professional providers at arm’s-length fees, with sponsors and custodians barred from directing provider activities beyond basic staking and unstaking decisions. All assets must remain staked continuously, except for liquidity reserves that meet exchange requirements, temporary holdings for expenses and redemptions, or extraordinary events. Digital assets must be indemnified from slashing penalties caused by provider activities, while staking rewards net of expenses must be distributed at least quarterly rather than being automatically compounded. Jason Schwartz, tax partner at CahillNXT, known as CryptoTaxGuy, noted several implementation challenges facing fund managers. “The safe harbor prohibits auto-compounding rewards, and because block rewards might not be immediately withdrawable, sponsors will need rough justice methods for calculating staking income,” he explained. The framework explicitly treats all staking rewards as taxable income, eliminating disagreement among tax lawyers about whether block rewards constitute taxable events. Schwartz also identified potential advantages for ETFs using liquid staking tokens rather than direct staking. “If a grantor trust holds only non-rebasing LSTs, it arguably could take the position that its shareholders have no taxable income until they sell or redeem,” he noted. However, he cautioned that the IRS could revoke its notice or clarify that LSTs should be looked through to underlying activities, creating regulatory uncertainty despite the theoretical tax benefits. Bill Hughes, Lawyer at Consensys, also weighs in, saying, “This safe harbor provides long-awaited regulatory and tax clarity for institutional vehicles such as crypto ETFs and trusts, enabling them to participate in staking while remaining compliant.” Industry Leaders Welcome Institutional Staking Breakthrough Alison Mangiero, Head of Staking Policy at the Crypto Council for Innovation, stated that the guidance removes major barriers preventing institutional participation in staking. “It also affirms what the market already knows: staking is here to stay, and thoughtful policy can ensure it thrives responsibly in the United States,” she stated. Mangiero also emphasized the guidance’s strategic significance, extending beyond its immediate operational impacts. “This guidance not only concretely builds on the SEC’s recent staking guidance, it also shows that Treasury is delivering on key areas of focus outlined in the President’s Working Group Report,” she added. The Treasury guidance builds on the SEC Division of Corporation Finance’s May statement, clarifying that certain protocol staking activities don’t constitute securities. SEC Chair Paul Atkins backed that position in August, calling it “a significant step forward in clarifying the staff’s view about crypto asset activities that do not fall within the SEC’s jurisdiction.” These developments emerged alongside the SEC’s Project Crypto Initiative, launched in July to modernize securities regulations and enable on-chain financial markets. Nate Geraci, a renowned ETF analyst, also emphasized the magnitude of the transformation in just two years, from the Biden era to now getting “tax clarity on staking in ETFs that now hold those very same proof of stake tokens.” “We’ve come so far,” he said. Looking forward, while the guidance is a breakthrough, it still leaves several tax questions unresolved. Among them, it is unclear whether staking income constitutes unrelated business taxable income for tax-exempt entities, such as IRAs, and whether foreign investors face U.S. income tax or withholding obligations on staking rewards earned through crypto ETFsThe U.S. Treasury Department and Internal Revenue Service issued sweeping new guidance allowing crypto exchange-traded products to stake digital assets and distribute staking rewards to retail investors. Treasury Secretary Scott Bessent announced the move would “increase investor benefits, boost innovation, and keeps America the global leader in digital asset and blockchain technology.” The guidance comes two years after the then-SEC Chair Gary Gensler suggested proof-of-stake tokens were securities. The new framework provides tax clarity for staking in ETFs that hold the same proof-of-stake tokens, with the IRS establishing a safe harbor under which crypto ETFs structured as grantor trusts can stake without incurring corporate taxation. Explained: Safe Harbor Requirements According to the IRS, the safe harbor imposes strict operational requirements on crypto ETFs that pursue staking activities. Funds must stake through unrelated professional providers at arm’s-length fees, with sponsors and custodians barred from directing provider activities beyond basic staking and unstaking decisions. All assets must remain staked continuously, except for liquidity reserves that meet exchange requirements, temporary holdings for expenses and redemptions, or extraordinary events. Digital assets must be indemnified from slashing penalties caused by provider activities, while staking rewards net of expenses must be distributed at least quarterly rather than being automatically compounded. Jason Schwartz, tax partner at CahillNXT, known as CryptoTaxGuy, noted several implementation challenges facing fund managers. “The safe harbor prohibits auto-compounding rewards, and because block rewards might not be immediately withdrawable, sponsors will need rough justice methods for calculating staking income,” he explained. The framework explicitly treats all staking rewards as taxable income, eliminating disagreement among tax lawyers about whether block rewards constitute taxable events. Schwartz also identified potential advantages for ETFs using liquid staking tokens rather than direct staking. “If a grantor trust holds only non-rebasing LSTs, it arguably could take the position that its shareholders have no taxable income until they sell or redeem,” he noted. However, he cautioned that the IRS could revoke its notice or clarify that LSTs should be looked through to underlying activities, creating regulatory uncertainty despite the theoretical tax benefits. Bill Hughes, Lawyer at Consensys, also weighs in, saying, “This safe harbor provides long-awaited regulatory and tax clarity for institutional vehicles such as crypto ETFs and trusts, enabling them to participate in staking while remaining compliant.” Industry Leaders Welcome Institutional Staking Breakthrough Alison Mangiero, Head of Staking Policy at the Crypto Council for Innovation, stated that the guidance removes major barriers preventing institutional participation in staking. “It also affirms what the market already knows: staking is here to stay, and thoughtful policy can ensure it thrives responsibly in the United States,” she stated. Mangiero also emphasized the guidance’s strategic significance, extending beyond its immediate operational impacts. “This guidance not only concretely builds on the SEC’s recent staking guidance, it also shows that Treasury is delivering on key areas of focus outlined in the President’s Working Group Report,” she added. The Treasury guidance builds on the SEC Division of Corporation Finance’s May statement, clarifying that certain protocol staking activities don’t constitute securities. SEC Chair Paul Atkins backed that position in August, calling it “a significant step forward in clarifying the staff’s view about crypto asset activities that do not fall within the SEC’s jurisdiction.” These developments emerged alongside the SEC’s Project Crypto Initiative, launched in July to modernize securities regulations and enable on-chain financial markets. Nate Geraci, a renowned ETF analyst, also emphasized the magnitude of the transformation in just two years, from the Biden era to now getting “tax clarity on staking in ETFs that now hold those very same proof of stake tokens.” “We’ve come so far,” he said. Looking forward, while the guidance is a breakthrough, it still leaves several tax questions unresolved. Among them, it is unclear whether staking income constitutes unrelated business taxable income for tax-exempt entities, such as IRAs, and whether foreign investors face U.S. income tax or withholding obligations on staking rewards earned through crypto ETFs