Sourcing, Character & Withholding with respect to Digital Asset Transactions

Summary

SIFMA provided supplemental comments to the August 20, 2025, letter ¹ regarding brokers' information reporting and withholding responsibilities with respect to the staking of digital assets, such as ether held by an ether exchange-traded product ("ETP").

Excerpt

I. Background with Respect to Staking Rewards

"Proof of stake" is the mechanism by which transactions on the Ethereum blockchain (and certain other blockchains) are validated. Those who wish to validate transactions on such a blockchain are required to "lock up" their tokens and, upon validating a transaction, are typically compensated with newly created tokens that the staker is permitted to "mint" by writing additional blocks to the blockchain. In addition, it is possible to earn a return indirectly by providing stake-able tokens to others (e.g., centralized exchanges) who in turn stake the tokens and share the rewards. "Liquid staking" tokens, which represent the right to tokens that have been staked (and therefore locked up) as well as their rewards, also are available for trading. And, as described below, ETPs have begun to stake, resulting in staking income to their investors.

A. IRS Guidance on Staking Rewards

In Rev. Rul. 2023-14, the Internal Revenue Service ("IRS") determined that a cash-method taxpayer is required to include the fair market value of staking rewards in gross income in the taxable year when that taxpayer gains dominion and control over them, regardless of whether the taxpayer stakes directly or through a centralized exchange.

B. Developments Since Revenue Ruling 2023-14

After publication of Rev. Rul. 2023-14, several investment fund sponsors created ETPs classified as grantor trusts that hold different types of digital assets which are recorded on a blockchain and can be staked. These ETPs trade much like stocks and most brokers and custodians permit customers to hold units of them in their accounts. Brokers apply the information reporting rules for widely held fixed investment trusts ("WHFITs") to digital asset ETPs organized as grantor trusts.

The ETPs initially did not stake their digital assets out of concern that doing so would endanger their status as investment trusts under Treas. Reg. § 301.7701-4(c). After receiving requests for guidance, the IRS published Rev. Proc. 2025-31, which provides a safe harbor that allows grantor trusts that hold proof-of-stake digital assets ("staking ETPs") to stake those assets and maintain their tax status as investment trusts.3 Many staking ETPs have started to stake their holdings in reliance on Rev. Proc. 2025-31.