David Schwartz’s XRP staking idea tests IRS reward tax rules

David Schwartz, Ripple’s former chief technology officer, has renewed debate over how staking rewards should be taxed if XRP Ledger ever adopted a native staking model.

His comments came during a discussion with crypto tax expert Clinton Donnelly about whether staking rewards should face tax before a holder sells them.

David Schwartz separates minted rewards from transferred rewards

David Schwartz said the tax treatment should depend on how a staking system creates and delivers rewards. In his view, rewards that already exist and are transferred to a user can be treated as taxable income when received.

He drew a different line for rewards created by the same staking process that distributes them. Schwartz wrote, “If the staking rewards are created by the staking process, then it’s just like if you knitted a sweater for sale. There’s no tax due until you sell the sweater.”

That statement frames newly minted staking rewards as created property rather than immediate income. It also challenges a broad reading of IRS guidance that treats proof-of-stake rewards as taxable when the taxpayer gains control.

XRP staking remains only a theoretical model

The discussion does not mean XRP Ledger now supports native staking. XRPL does not use proof-of-stake consensus, and holders cannot stake XRP directly on the network in the same way users stake tokens on networks such as Ethereum.

Schwartz’s comments focused on how a possible design might work if the ecosystem ever explored a staking-like model. He said tax treatment would depend on whether rewards are newly created or paid by another party for a service.

That distinction matters because XRP holders currently seek yield through third-party exchanges, lending services, liquidity pools, or DeFi systems. Those routes carry platform, smart contract, and market risks.

As previously reported by crypto.news, Schwartz has also been active in recent XRPL debates, including discussions around network upgrades and how the ledger handles changes through amendments.

IRS staking rule remains the tax backdrop

The IRS issued Revenue Ruling 2023-14 on staking rewards. The rule says a cash-method taxpayer must include the fair market value of staking rewards in gross income when they gain dominion and control over the tokens.

That means the agency generally treats proof-of-stake rewards as taxable when the taxpayer can sell, exchange, or transfer them. The rule also applies when rewards come through a crypto exchange.

Schwartz’s argument questions whether that approach fits every protocol design. He said rewards paid from an existing source look like compensation. By contrast, rewards minted during the staking process may look closer to property created by the participant.

The debate remains unresolved for XRP because the network does not have native staking. For now, Schwartz’s “knitted sweater” model gives the XRP community a framework for discussing future reward systems and tax treatment before any technical change is proposed.