IRS Staking Rules Reversed After Industry Pushback
The IRS released updated IRS staking guidance on October 6 that lets digital asset trusts stake without losing their tax classification. Revenue Procedure 2026-20 quietly reversed three restrictions from the 2025 rules after industry comments argued the original version was unworkable.
The new IRS staking safe harbor replaces last year's Rev. Proc. 2025-31. Investment trusts and grantor trusts, including exchange-traded products like Grayscale's HYPG and BlackRock's ETHA, can now participate in crypto staking without the activity forcing them into business-entity status. Under prior IRS interpretation, staking could be read as giving the trust a power to vary investments, which would break the investment-trust classification and eliminate passthrough treatment.
Three Key Changes to IRS Staking Requirements
The new procedure made three changes that industry groups had requested. First, trusts can now use multiple custodians instead of being limited to one. Second, slashing protection must cover only events reasonably within the staking provider's control, not all slashing. The original rule would have required indemnification against validator penalties even when a chain's consensus rules changed after the agreement was signed. Third, the IRS now permits contingent liquidity arrangements, such as credit lines or agreements to buy digital assets, for meeting redemptions.
Staking rewards still must be distributed within 60 days after the end of the calendar quarter in which the trust gains control. Rewards must be paid either as additional units of the same digital asset the trust already holds or converted to cash. The trust cannot hold multiple asset types at once. Borrowing digital assets through a tax-treated loan disqualifies the trust from the safe harbor.
Impact on Exchange-Traded Products
Trusts that trade on a national securities exchange and hold only cash and one proof-of-stake digital asset qualify for the IRS staking safe harbor. Grayscale disclosed in its October 5 filing that about 88.66% of its HYPG fund's assets were staked as of that date, earning an average gross yield of 2.26%. BlackRock's ETHA held about 3.76 million ETH in Q3 after buying over 1 million tokens during the quarter, per Arkham Intelligence data cited in September reports.
Trusts have six months from October 6 to comply with the IRS staking rules. Those that already met the 2025 safe harbor can keep relying on it until April 6, 2027. After that date, the old guidance expires. Actions taken during the transition window to meet the new requirements, such as amending a trust agreement to authorize staking or switching to a compliant custody setup, will not disqualify the trust.
The Treasury and IRS issued the procedure without a formal notice-and-comment period, similar to how the agency recently withdrew two crypto surveillance rules. The document cites Section 7805(b) authority but does not reference specific public comments that drove the changes. Industry lawyers who submitted letters on the 2025 proposal had argued that single-custodian and unlimited-slashing rules would block real-world implementations.