Former Ripple CTO David Schwartz has sparked a discussion on how potential XRP staking rewards could be taxed, outlining a model that would defer taxation until the holder sells the tokens. Speaking with crypto tax specialist Clinton Donnelly, Schwartz argued that the tax treatment hinges on whether rewards are newly created by a staking protocol or transferred from an existing pool.
Schwartz drew a sharp distinction between the two scenarios. When rewards are simply moved from one party to another, he believes the IRS has a strong case for treating them as taxable income upon receipt. However, if tokens are minted as part of the staking process, he likened it to knitting a sweater for sale: “There’s no tax due until you sell the sweater.” This view challenges the IRS’s current stance under Revenue Ruling 2023-14, which generally requires cash-method taxpayers to include the fair market value of proof-of-stake rewards in gross income as soon as they gain dominion and control.
The conversation is entirely theoretical because the XRP Ledger does not support native staking—it uses federated consensus rather than proof-of-stake. XRP holders currently earn yield through exchanges, lending platforms, or DeFi services, which carry counterparty and smart contract risks. Schwartz noted that any future staking design would need careful technical planning to separate rewards from third-party payments. His comments follow earlier skepticism about XRPL automated market makers, where he cautioned that liquidity providers could lose value if XRP’s price drops.
Although no staking upgrade is planned, Schwartz’s remarks provide a tax framework for the XRP community and could influence broader debates on the taxation of newly created digital assets versus existing token transfers.
