Cryptocurrency ETF Revolution! U.S. IRS Opens Era of Retail Sharing of Staking Rewards

The U.S. Department of the Treasury’s Internal Revenue Service (IRS) has updated guidance on cryptocurrency exchange-traded products (ETPs), providing a safe harbor for trust institutions to stake digital assets. U.S. Treasury Secretary Scott Bessent stated that the agencies have issued guidance offering a “clear pathway for cryptocurrency ETFs to pledge digital assets and share staking rewards with retail investors.”

IRS New Guidance Opens Era of Staking Safe Harbor

(Source: X)

The guidance issued by the IRS appears to clarify regulatory provisions for staking cryptocurrencies through exchange-traded products. According to the guidance on the IRS website, government agencies will permit crypto trusts to participate in staking, provided they are traded on national securities exchanges, hold only cash and “units of a single type of digital asset” held by custodians, and reduce specific risks faced by investors.

This policy is significant because it opens a new revenue stream for cryptocurrency ETFs. Staking is a core mechanism of proof-of-stake (PoS) blockchains, where users lock up tokens to validate transactions and maintain network security, earning staking rewards in return. After Ethereum’s transition to PoS in 2022, annual staking yields typically range from 3% to 5%. For ETFs holding large amounts of Ethereum, this yield can be quite substantial.

Consensys senior attorney Bill Hughes tweeted on Monday, “This should have a major impact on the adoption of staking technology.” Hughes wrote, “This safe harbor provision provides long-awaited regulatory and tax clarity for crypto ETFs and trusts, enabling them to participate in staking within a compliant framework. It effectively removes the primary legal barriers that previously hindered fund sponsors, custodians, and asset managers from incorporating staking income into regulated investment products.”

Prior to this, the biggest challenge for crypto ETF issuers was regulatory uncertainty. While Ethereum spot ETFs were approved for listing in July 2024, the SEC and IRS had not provided clear guidance on whether these ETFs could participate in staking or how to handle staking rewards for tax purposes. This led major asset managers like BlackRock and Fidelity to avoid staking when launching Ethereum ETFs, due to concerns over potential regulatory risks.

The IRS update fundamentally changes the game. The core of the “safe harbor” clause is to provide legal protection for qualifying crypto ETFs, so long as they adhere to the specified framework, they will not face tax or regulatory penalties for participating in staking. This clarity is crucial for risk-averse institutional investors, as it eliminates the biggest legal obstacle to compliance.

Compliance Requirements and Limitations for Staking ETFs

According to IRS guidance, crypto trusts must meet the following conditions to qualify for the staking safe harbor:

Compliance Checklist

Listed on an Exchange: Must be traded on a national securities exchange to ensure liquidity and transparency

Single Asset Holding: Can only hold cash and units of a single type of digital asset held by a custodian; multi-cryptocurrency portfolios are not permitted

Professional Custody: Digital assets must be held by qualified custodians, not managed directly by the fund manager

Risk Disclosure: Must disclose specific risks faced by investors, including technical risks related to staking and market risks

While these requirements seem straightforward, they set a high bar. The restriction to single asset holdings means ETFs seeking diversification across multiple cryptocurrencies cannot benefit from the safe harbor. The requirement for professional custody excludes many small funds, as qualified custodial services meeting SEC and IRS standards are limited and costly.

From an investor perspective, these restrictions offer additional protections. Holding a single asset ensures transparency, allowing investors to know exactly what they own. Professional custody reduces risks of theft or misappropriation. The risk disclosure mandates fund managers to clearly explain potential issues such as lock-up periods, slashing risks, and technical failures.

Notably, the IRS guidance also references the SEC’s September approval of general listing standards. This regulatory change is expected to pave the way for more crypto ETFs to list. The IRS and Treasury’s mention of SEC rule changes in the updated guidance indicates coordinated efforts to foster a more friendly regulatory environment for crypto ETFs.

Such cross-agency coordination is uncommon in the U.S. federal regulatory system. Historically, agencies like the SEC, CFTC, and IRS have had conflicting stances on cryptocurrencies, causing confusion among market participants. The “crypto-friendly” policies promoted by the Trump administration are shifting this landscape, with the IRS staking guidance being a recent example of this trend.

Long-term Impact of Clear Regulation on the Crypto Market

The IRS staking guidance will have multiple effects on the crypto ETF market. First, existing Ethereum ETFs may soon begin participating in staking. The largest such funds, BlackRock’s iShares Ethereum Trust (ETHA) and Fidelity’s Fidelity Ethereum Fund (FETH), manage over $7 billion combined. If these funds start staking, with an estimated annual yield of 4%, they could generate approximately $280 million in additional annual income.

How will this staking income be distributed to investors? The most likely method is automatic reinvestment—using staking rewards to buy more Ethereum and distribute it to existing shareholders—similar to dividend reinvestment plans. This would allow crypto ETFs to offer not only price exposure but also a fixed income component akin to bonds, making them attractive to institutional investors seeking stable returns.

Second, this may incentivize more PoS blockchain ETFs to apply for approval. Currently, the market has spot ETFs for Bitcoin and Ethereum, but other major PoS chains like Solana, Cardano, and Polkadot have yet to be approved. The IRS guidance removes key regulatory hurdles for these potential ETFs, likely prompting more asset managers to submit applications. If approved and able to participate in staking, these ETFs could attract significant institutional capital into those blockchains.

Third, this could alter valuation models for cryptocurrencies. When ETFs can generate stable staking yields, investors might use traditional valuation methods like discounted cash flow (DCF) models to assess these assets. This approach could make cryptocurrencies more akin to traditional financial assets, reducing their image as purely speculative investments and attracting more conservative investors.

On a macro level, legitimizing staking rewards could accelerate the integration of traditional finance and crypto markets. Pension funds, endowments, and insurance companies often have strict investment policies requiring clear regulatory oversight and stable income streams. Crypto ETFs now meet these criteria, potentially becoming part of these institutions’ portfolios.

Timing Amidst Government Standoff

The timing of the IRS staking guidance is quite dramatic. Reports on Sunday indicated that after over 40 days, several Democratic senators broke party lines to support a continuing resolution to end the government shutdown, extending funding until January next year. As of this writing, the Senate has not yet voted on the bill. Since October 1, when the government shutdown began, many agencies, including the SEC and IRS, have had employees on forced leave.

Releasing this guidance as the government shutdown nears resolution suggests the Trump administration views cryptocurrency regulation as a priority. Typically, during shutdowns, only “essential services” continue, and non-urgent policy guidance is postponed. The IRS’s decision to issue staking guidance at this juncture likely reflects pressure from the crypto industry and Congress.

Treasury Secretary Scott Bessent’s public endorsement on X (formerly Twitter) is also unusual. Usually, the Treasury Secretary does not personally promote specific IRS guidance, indicating high-level attention from the White House. Bessent’s statement may signal to markets that the Trump administration is serious about its commitment to making the U.S. a global crypto hub.