IRS Issues Safe Harbor Allowing Investment Trusts to Stake Digital Assets Without Losing Favorable Tax Status

The Internal Revenue Service issued new guidance providing a safe harbor for certain investment trusts and grantor trusts that engage in staking of digital assets. This safe harbor gives trustees and sponsors a pathway to participate in proof-of-stake blockchain networks without jeopardizing the trust’s classification as an investment trust under Treas. Reg. §301.7701-4(c) or its treatment as a grantor trust for federal income tax purposes.

In a typical custodial staking arrangement, a third-party custodian holds a taxpayer’s digital assets and facilitates their staking on a blockchain network. Staking rewards, newly minted tokens or other returns, are generally shared between the asset owner and the staking provider under a pre-arranged allocation formula. Staking rewards are earned by locking up some of the trust's coins, either for a predetermined period of time or at will with a short delay, to help validate transactions and support the network's system. Staking rewards compensate the asset owner for supporting the network's operations. 

Historically, investment trusts were not permitted to engage in activities that could be viewed as operating a business or “varying the investments” of certificate holders. As a result, staking activity risked converting a passive investment trust into a business trust and potentially reclassifying it as a corporation or partnership for tax purposes. Because regular trusts are not publicly traded, they do not have to be concerned about being reclassified as business trusts taxed as either partnerships or corporations. The new IRS guidance provides much-needed clarity and relief by setting out the circumstances under which a trust may authorize and conduct staking without altering its tax status. The guidance is effective for tax years ending on or after November 10, 2025.

The safe harbor applies to an arrangement that:

1. Would qualify as an investment trust and as a grantor trust if the trust did not authorize staking; and

2. Qualified as such immediately before its governing instrument was amended to authorize staking.

If the requirements listed below are met, the IRS will not treat the authorization or performance of staking activities as inconsistent with investment trust or grantor trust status.

To qualify for the safe harbor:

• Exchange-Traded Interests. Trust interests must be traded on a national securities exchange and comply with applicable SEC regulations governing staking.

• Single Digital Asset Type. The trust may hold only cash and a single type of digital asset as defined under Code §6045(g)(3)(D).

• Proof-of-Stake Network. Transactions in the trust’s digital asset must occur on a permissionless proof-of-stake network.

• Custodial Control. The digital assets must be held by a custodian acting on behalf of the trust, which alone may exercise ownership rights, including during staking.

• Purpose of Staking. Staking must serve to protect and conserve trust property, such as mitigating network control risks, rather than operate a business.

• Permitted Activities. The trust’s operations must be limited to traditional passive activities, such as accepting deposits, holding assets, paying expenses, redeeming or issuing units, selling assets for liquidation, and directing staking in compliance with exchange requirements.

• Delegated Staking. The trust may direct staking only through custodians who work with independent staking providers. The trust and custodian cannot direct or participate in the staking provider’s operations.

• Risk Management. The trust must have liquidity policies tied solely to exchange redemption rules and must ensure that its assets are indemnified from slashing losses.

• Rewards. The only new property the trust may receive from staking is additional units of the same digital asset it already holds.

Existing investment trusts have a nine-month window, beginning November 10, 2025, to amend their governing instruments to authorize staking in accordance with the safe harbor. Such an amendment will not, by itself, alter the trust’s classification as an investment or grantor trust, provided all requirements are satisfied.

This safe harbor provides long-awaited certainty for sponsors and trustees of digital asset investment trusts seeking to participate in proof-of-stake networks. Trusts that comply with the new requirements can earn staking rewards while maintaining favorable tax treatment as investment trusts and grantor trusts. Trustees and fund sponsors should review existing trust agreements to determine whether amendments will be necessary to take advantage of the new rules and should plan to act within the nine-month amendment window beginning in late 2025.

For more information, contact Liskow attorneys Leon Rittenberg III, Caroline Lafourcade, and Kevin Naccari and visit Liskow's Tax practice page.