Staking
Definition
Locking up cryptocurrency in a proof-of-stake blockchain to help validate transactions and secure the network, earning rewards in return — similar to earning interest.
Staking is a way to earn passive income on your cryptocurrency holdings. In proof-of-stake (PoS) blockchains, validators are chosen to create new blocks and verify transactions based on the amount of cryptocurrency they've "staked" (locked up) as collateral. In return, stakers earn rewards, typically ranging from 3% to 15% annually depending on the network.
You can stake directly by running a validator node (which requires technical knowledge and minimum stake amounts) or delegate your stake to a validator through an exchange or staking service. Delegated staking is the most common approach — platforms like Coinbase, Kraken, and Lido handle the technical details while you earn rewards.
Major stakeable assets include Ethereum (ETH), Solana (SOL), Cardano (ADA), Polkadot (DOT), and Cosmos (ATOM). After Ethereum's transition to proof-of-stake in 2022, ETH staking became one of the largest staking markets, with yields typically around 3-5% APY.
Staking rewards have tax implications. In the US, staking rewards are generally taxed as ordinary income at their fair market value when received. When you later sell staked tokens, you also owe capital gains tax on any appreciation since the income was recognized.
The main risk of staking is illiquidity — staked tokens often have an unbonding period (days to weeks) before they can be withdrawn. There's also slashing risk, where validators can lose a portion of staked funds for misbehavior or downtime, though this primarily affects direct validators.
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Related Terms
Frequently Asked Questions
Are staking rewards taxable?
Yes, in the US, staking rewards are taxed as ordinary income at their fair market value when you receive them. You also owe capital gains tax when you sell the rewarded tokens if they've appreciated since you received them.
Can I lose money staking?
The staked tokens themselves are safe in most cases, but the token's price can decline while staked. There's also a small risk of slashing (losing some staked funds) if your validator misbehaves, and some staking protocols have lock-up periods during which you can't sell.