The U.S. Treasury Department and Internal Revenue Service issued sweeping new guidance allowing crypto exchange-traded products to stake digital assets and distribute staking rewards to retail investors.

Treasury Secretary Scott Bessent announced the move would “increase investor benefits, boost innovation, and keeps America the global leader in digital asset and blockchain technology.”

The guidance comes two years after the then-SEC Chair Gary Gensler suggested proof-of-stake tokens were securities.

The new framework provides tax clarity for staking in ETFs that hold the same proof-of-stake tokens, with the IRS establishing a safe harbor under which crypto ETFs structured as grantor trusts can stake without incurring corporate taxation.

According to the IRS, the safe harbor imposes strict operational requirements on crypto ETFs that pursue staking activities.

Funds must stake through unrelated professional providers at arm’s-length fees, with sponsors and custodians barred from directing provider activities beyond basic staking and unstaking decisions.

All assets must remain staked continuously, except for liquidity reserves that meet exchange requirements, temporary holdings for expenses and redemptions, or extraordinary events.

Digital assets must be indemnified from slashing penalties caused by provider activities, while staking rewards net of expenses must be distributed at least quarterly rather than being automatically compounded.

Jason Schwartz, tax partner at CahillNXT, known as CryptoTaxGuy, noted several implementation challenges facing fund managers.

“The safe harbor prohibits auto-compounding rewards, and because block rewards might not be immediately withdrawable, sponsors will need rough justice methods for calculating staking income,” he explained.

The framework explicitly treats all staking rewards as taxable income, eliminating disagreement among tax lawyers about whether block rewards constitute taxable events.

Schwartz also identified potential advantages for ETFs using liquid staking tokens rather than direct staking.

“If a grantor trust holds only non-rebasing LSTs, it arguably could take the position that its shareholders have no taxable income until they sell or redeem,” he noted.

However, he cautioned that the IRS could revoke its notice or clarify that LSTs should be looked through to underlying activities, creating regulatory uncertainty despite the theoretical tax benefits.

Bill Hughes, Lawyer at Consensys, also weighs in, saying, “This safe harbor provides long-awaited regulatory and tax clarity for institutional vehicles such as crypto ETFs and trusts, enabling them to participate in staking while remaining compliant.”