IRS Updates Guidelines on Staking Digital Assets by Trusts
The Internal Revenue Service (IRS) has recently made significant adjustments to its guidelines regarding the staking of digital assets by certain trusts without impacting their federal income tax status. The new regulations, established under Revenue Procedure 2026-20 and released on October 6, specifically benefit investment and grantor trusts that hold digital currencies on open networks employing proof of stake (PoS) mechanics. This update supersedes the prior Revenue Procedure 2025-31, which initially outlined the regulations nearly a year earlier in November 2025.
Safe Harbor for Eligible Trusts
This newly introduced safe harbor allows eligible trusts to engage in staking activities while still adhering to the federal definitions of investment and grantor trusts as outlined in Section 301.7701-4(c). However, it is important to note that this guidance pertains solely to the classification of trusts, and does not imply a blanket tax exemption for any earnings derived from staking.
Eligibility and Compliance Requirements
According to the new procedure, only trusts formed legally under state law that satisfy the criteria for investment and grantor trusts may qualify. The IR structure mandates that interests in these trusts be traded on national securities exchanges, and the necessary disclosures about staking must be submitted to the Securities and Exchange Commission (SEC) through a valid registration statement. Compliance with the rules and liquidity risk policies of the listed exchange is also required.
Staking Operations and Asset Management
The allowable assets for staking are limited to cash and units of a single kind of digital asset that operates on a permissionless PoS network. Custodians are required to hold the digital assets at addresses under their control and must be the only entities with access to the private keys. The IRS has affirmed that ownership of the assets remains with the trust for tax purposes, even while staked.
Staking operations are required to be performed through custodians in collaboration with approved staking providers. To maintain independence, the trust and its sponsor must be unrelated to the staking provider, and any agreements concerning reward division must adhere to arm’s length terms. While the trust can direct when assets are to be staked or unstaked, it should not govern the overall operations of the staking providers.
Risk Management and Liquidity Provisions
Furthermore, the IRS emphasizes that staking is considered a method of safeguarding and preserving trust property, particularly as it mitigates the risk of a single participant or coordinated group dominating the staked assets and executing transactions that could devalue them. While trusts generally must make their digital assets available for staking, exceptions exist to accommodate liquidity and specific operational needs. For instance, parts of the holdings can remain unstaked if deemed necessary by the trustee to fulfill exchange redemption requirements. Assets that are no longer in reserve should be staked again promptly.
The regulations also permit temporary unstaking under certain conditions, such as when funding trust expenses, cash distributions, or redemptions. Additional exceptions might apply in cases of liquidation, regulatory changes, or actions taken to safeguard assets against potential systemic risks within the staking ecosystem.
Moreover, the framework allows trusts to establish contingent liquidity agreements to address events that could hinder their ability to respond to redemption requests. However, transactions that may be recognized as borrowing digital assets for tax purposes do not qualify as contingent liquidity under this safe harbor.
Staking Rewards and Industry Adoption
On the other hand, the risks associated with slashing—penalties linked to staking failures—require trusts to be protected from losses arising from deficiencies in provider controls.
Staking rewards must consist of additional units of the staked digital asset, and they are mandated to be distributed to trust holders proportionately following the deduction of trust expenses. The IRS stipulates that this distribution occurs no later than 60 days after the end of the quarter in which the rewards are received.
As the landscape for cryptocurrency investment evolves, many U.S. crypto funds have begun adopting structures in line with these new regulations. Notably, Fidelity recently announced intentions to incorporate Ethereum staking for its FETH fund, which was valued at approximately $898 million. Other major financial institutions, like Morgan Stanley and BlackRock, are also integrating similar staking architectures in their digital asset products to align with these guidelines.
Conclusion and Future Implications
The release of Revenue Procedure 2026-20 brings clarity following inquiries about the initial safe harbor established in late 2025. The new rules facilitate the use of multiple custodians and define scenarios for temporarily unstaking assets while addressing liquidity provisions as well as slashing protections. Existing trusts have until April 6, 2024, to adapt to the new requirements, but can still rely on the older guidelines in the interim. The updates apply to tax years concluding after October 6, 2026, and the IRS has cautioned against extending the guidance beyond its specific remit, excluding rulings on other potential federal tax issues surrounding staking income or related activities.
