Paschall, an Overview

In Paschall v. Commissioner, T.C. Memo. 2026-46, the US Tax Court ruled on the tax treatment of validation rewards received through a custodial staking-as-a-service arrangement.

The court held that the reward units received from the service were taxed as ordinary income based on their value at the time of receipt. In reaching its conclusion, the court held:

The court’s opinion has generated a lot of discussion with many downplaying its importance because it involved custodial staking or stating the pro se petitioners handled the case poorly, stipulating away key facts.

While the case does relate to custodial staking and the petitioners elected to submit the matter on stipulated facts, a review of the court’s findings and legal analysis indicates that it likely would have ruled the same way even if non-custodial staking was at issue, or if the case had been tried.

Facts and Posture

During 2021, petitioners staked Cardano through eToro’s staking-as-a-service program. The court sets forth some key facts that played a role in its analysis:

Procedurally, the case was submitted to the court with all the of facts agreed to by the parties, meaning there wasn’t a trial. In the opinion, the court expresses some frustration about this as it implies it had additional factual questions it would’ve liked the parties to present evidence on. As a result, the court spent time educating itself about blockchain technology and validation mechanisms, including proof of stake, through publicly available authorities.

Interestingly, the opinion cites several authorities discussing how validation works and how blockchain rewards are issued when an individual is operating a node directly. The court didn’t limit its discussion to staking-as-a-service arrangements, like the one at issue. This makes the court’s legal analysis a bit unclear and increases the scope of the analysis to beyond what is necessary to resolve the case.

The Court’s Analysis

Factually, petitioners’ receipt of validation reward units through eToro’s program should’ve been simple for the court to distinguish from the direct operation of a validation node. In substance, petitioners transferred the right to stake their Cardano units to eToro’s staking program, receiving additional Cardano in return based on the terms of the arrangement. Petitioners weren’t involved in the creation of any new property or the validation of any transactions on Cardano; they essentially rented out their units and were compensated for it.

But that wasn’t the court’s rationale—its reasoning wasn’t that narrow.

First, the court dismissed petitioners’ dominion and control argument stemming from eToro’s restriction on transferring units off platform, explaining that even if with the restriction, petitioners could always dispose of the units for cash on eToro. This makes sense. If anything, the restriction on transferability might have impacted the value of Cardano received, but it likely didn’t change the dominion and control aspect. The parties stipulated to the value of the units, so that wasn’t an issue.

Next, the court addressed petitioners’ dividend and self-created property arguments. It’s reasoning provides good insight into how the court might rule in future cases involving this issue, including ones with non-custodial staking.

Relying on Eisner, petitioners argued that the receipt of Cardano was nontaxable like a pro rata stock dividend. Crypto units aren’t stock and the Cardano blockchain isn’t a corporation, but the economic analogy is the basis for the argument, which has been made in other staking reward cases such as Jarrett v. USA, No. 24-cv-01209 (M.D. Tenn.). The basic premise is that newly created reward units aren’t income because the dilutive impact of the new units doesn’t change a staker’s economic position, meaning there is no accession to wealth.

In the context of Eisner and pro rata stock dividends, this concept makes sense. Before and after the dividend, the shareholder’s economic position and wealth haven’t changed relative to their investment in the company or other shareholders. In Paschall, the court dismissed the argument. While addressing some elements of the eToro staking program, the court’s reasoning went further, addressing the economics of staking rewards in general. The court noted that not all holders of Cardano participate in staking and that issuance of new tokens to specific validators increases the supply—and the overall value of Cardano—rather than dilutes it.

Turning to petitioners’ self-created property argument, the court also took an expansive approach. Its holding is insightful:

Stakers do not create anything by themselves. Instead, the staked tokens validate transactions on the blockchain. In exchange for validation, the cryptocurrency’s protocol grants stakers additional tokens. The fact that these tokens may be newly created is immaterial because the stakers are not the ones who created them. Further, petitioners were not owners or operators of a staking pool; unlike the baker or writer, they lacked the power to decide whether (and when) the property was created.

Although petitioners used a custodial staking service, the court’s language should give crypto investors pause. The holding doesn’t address custodial staking narrowly; it goes beyond petitioners’ facts, speaking generally about the receipt of additional units in exchange for validation. Only in the last sentence does the court cite petitioners’ situation as further support for its conclusion, noting they didn’t own or operate the staking pool.

Of particular interest is the last clause of the court’s conclusion, distinguishing stakers from bakers or writers. The court raises an interesting concept—creative control. It indicates that other property creators have complete control over the process—if, when, how, how much. Implying that validators don’t; they run a node, it follows the required consensus mechanism, and the network, through immutable architecture, dictates who, if, when, and how many tokens are created with each new block.

Finally, the court side steps any arguments relating to IRS Rev. Rul. 2023-14. Rather than discuss the impact of Loper Bright Enterprises v. Raimondo, 603 U.S. 871 (2024) on the IRS guidance, the court explains that its ruling is based upon section 61 and relevant caselaw.

Looking Ahead

Despite the narrow facts of the case, the court’s reasoning—and conclusion—is broad and shouldn’t be dismissed by taxpayers or practitioners. The opinion is only a memorandum opinion, which means it’s rationale and conclusion aren’t binding in other Tax Court cases, or on any other court. But it will be looked at as persuasive authority.

Going forward, the IRS will rely on this case. Taxpayers and practitioners will need to focus on factual distinctions while also pushing back on the court’s legal reasoning. There’s a need for expert testimony explaining how the validation process works and how that process aligns factually to other creators of property like a baker or writer. Experts focusing on the economics of validation or tokenomics will likely be less persuasive.

Ultimately, validation is a spectrum, with numerous permutations. Some run validation nodes directly; others delegate to validators through non-custodial or custodial arrangements. Although Paschall involved custodial arrangements, the court’s analysis appears to have reached beyond that, creating an uncertain and possibly difficult future for most validation reward recipients looking to defer income recognition. Ideally, Congress will legislate a fix, but until then, savvy advocacy will be needed.