The Internal Revenue Service (IRS) and the Department of the Treasury have issued Rev. Proc. 2025-31 to provide a safe harbor for trusts seeking to engage in the staking of digital assets while maintaining their favorable classification as investment trusts under § 301.7701-4(c) and as grantor trusts for Federal income tax purposes. This procedure addresses the critical question of whether staking activities constitute a "business" enterprise or grant the trust a prohibited "power to vary the investment," either of which could lead to reclassification as an association taxable as a corporation.

Purpose of Relief

The relief granted is a definitive safe harbor: provided all specified requirements are met, the authorization and resulting staking of digital assets will not prevent the trust from qualifying as an investment trust under § 301.7701-4(c) and as a grantor trust. Furthermore, the Revenue Procedure provides a limited window, beginning on November 10, 2025, for existing trusts to amend their governing instruments to authorize staking in accordance with the safe harbor requirements without jeopardizing their status.

Factual Background: Digital Assets and Proof-of-Stake

Digital assets, defined as digital representations of value recorded on a cryptographically secured distributed ledger or similar technology (under section 6045(g)(3)(D) of the Code), are generally treated as property for Federal income tax purposes. This procedure focuses exclusively on digital assets whose transactions are carried out on a permissionless network utilizing a proof-of-stake consensus mechanism.

The proof-of-stake mechanism requires validator node operators to commit or "stake" digital assets to become eligible to validate new blocks of data and update the network’s blockchain. While staked, these digital assets are "locked up" and nontransferable for a period specified by the protocol. The need for this activity stems from the requirement to maintain the security and integrity of the blockchain, specifically by preventing a single party or group from controlling a majority of the total staked assets, which could allow manipulation (e.g., "double spending"). Staking is thus incentivized through "rewards," which are newly minted digital assets and/or fees paid by parties seeking to add transactions to the blockchain. Conversely, a validator failing to act in accordance with the consensus mechanism may face a penalty known as "slashing," resulting in the forfeiture of some staked units.

Trusts typically participate in staking through custodial staking, where a third-party custodian takes custody of the assets and facilitates staking with one or more staking providers.

IRS Legal Analysis and Rationale for Relief

The relief is needed because the classification of a state-law trust for Federal income tax purposes is governed by Regulation § 301.7701-4. An entity recognized for Federal tax purposes that is not properly classified as a trust is considered a "business entity".

Trust vs. Business Entity

An arrangement is treated as a trust if its purpose is to vest in trustees the responsibility to protect or conserve property for beneficiaries who are not associates in a joint enterprise for the conduct of business for profit. Conversely, arrangements created as a device to carry on a profit-making business are classified as business or commercial trusts, which are not taxed as trusts but rather as associations (e.g., corporations or partnerships).

The Prohibited Power to Vary Investments

Crucially, an investment trust holding assets with a single class of ownership interests must satisfy the requirement under § 301.7701-4(c) that there is no power under the trust agreement to vary the investments of the certificate holders.

A power to vary investments exists where the trust instrument grants a managerial power enabling the trust to take advantage of variations in the market to improve the investments of certificate holders. This principle was established in Comm’r v. North American Bond Trust, 122 F.2d 545 (2d Cir. 1941), cert. denied, 314 U.S. 701 (1942).

The IRS reviewed prior rulings to distinguish between activities of protection/conservation and activities that constitute a prohibited managerial power:

No Power to Vary: If the trustee is limited to short-term, fixed-return investments (e.g., short-term U.S. obligations or CDs) that eliminate the opportunity to profit from market fluctuations, the power to invest is not considered a power to vary the trust’s investment (Rev. Rul. 75-192, 1975-1 C.B. 384). Likewise, the power to consent to changes in credit support for debt obligations to maintain the value of trust property by preserving the credit rating of bonds is not a power to vary (Rev. Rul. 90-63, 1990-2 C.B. 270).
Business or Managerial Activity: Trusts whose trustees possess broad powers, such as purchasing and selling real estate, erecting structures, making improvements, and borrowing money, are classified as associations taxable as corporations (Rev. Rul. 78-371, 1978-2 C.B. 344).

Grantor Trust Status

A person treated as the owner of an undivided fractional interest in a trust under Subpart E of Part I, Subchapter J of Chapter 1 of the Code (sections 671 and following), is considered to own the trust assets attributable to that interest for Federal income tax purposes (Rev. Rul. 88-103, 1988-2 C.B. 304; Rev. Rul. 85-13, 1985-1 C.B. 184). Section 671 provides for the inclusion of the trust’s income, deductions, and credits in the computation of the owner’s taxable income. Section 677(a) treats the grantor as the owner if the income may be distributed or accumulated for the grantor without the consent of an adverse party.

Application of Law and the Safe Harbor Requirements

The safe harbor allows trusts to stake digital assets only if the activity aligns with the purpose of protecting and conserving property and explicitly prohibits the trust from exercising a power to vary investments.

Essential Requirements for Investment Trust Status

To qualify under the safe harbor, the trust must satisfy the following technical requirements outlined in Section 6.02:

Asset Limitation: The trust may own only cash and units of a single type of digital asset, provided transactions are carried out on a proof-of-stake permissionless network.
Purpose of Staking: The staking activity must primarily serve to protect and conserve trust property by mitigating the risk that an external party could control a majority of staked assets and reduce the value of the trust’s holdings.
Prohibition on Managerial Power: The trust agreement must explicitly prohibit the trust from seeking to take advantage of variations in the market to improve investments, including variations based on the value of the digital assets or the amount of staking rewards.
Limited Activities: Permitted activities are highly restricted, primarily revolving around the issuance and redemption of trust interests (accepting deposits, distributing assets/cash), paying expenses (including selling assets for cash to cover expenses), holding assets, and directing staking.
Custody and Control: A custodian must hold the digital assets at addresses under its control. Only the custodian may access the private keys to effect a sale, transfer, or exercise ownership rights. Crucially, the trust must retain ownership of the digital assets for Federal income tax purposes even while they are staked.
Arm’s Length Staking Arrangement: The trust/sponsor must be unrelated to the staking provider, and the trust must direct staking through custodians. The allocation of staking rewards must be an arm’s length allocation independent of the provider’s or custodian’s expenses. The trust, custodian, and sponsor are prohibited from directing or controlling the staking provider’s activities, except to direct staking/unstaking.
Indemnification: The trust’s digital assets must be indemnified from slashing penalties resulting from the activities of staking providers, underscoring the conservation purpose.
Rewards Distribution: The only new assets received from staking must be additional units of the single type of digital asset held by the trust. Staking rewards, net of expenses, must be distributed in-kind or sold for cash and the proceeds distributed to interest holders on a periodic basis, no less frequently than quarterly.

Compliance with Securities Regulation and Liquidity

A significant component of the safe harbor involves external regulatory compliance, ensuring the trust’s operations do not resemble an active business venture divorced from investor protection:

Exchange Trading: Interests in the trust must be traded on a national securities exchange, and the trust’s activities must comply with SEC regulations and rules. Required public disclosure regarding staking must have been reviewed and approved by the SEC.
Liquidity Risk Management: The trust must maintain written liquidity risk policies and procedures that comply with the rules of the national securities exchange. These policies are designed to ensure the trust can meet redemption requests, especially considering that staked assets are "locked up".
Liquidity Reserve: To comply with exchange rules that assets be readily available, the trust may stake less than all its digital assets to create and maintain a liquidity reserve. This reserve must be based solely on factors related to meeting redemption requests within the required period.
Contingent Liquidity Arrangement: The trust may enter into a contingent liquidity arrangement (e.g., a lending facility or an arrangement to sell/purchase assets) to mitigate adverse liquidity events that might otherwise prevent the distribution of assets or cash for redemptions.

The requirement that the trust adhere to strict liquidity policies mandated by the national securities exchange ensures that management decisions regarding staking and unstaking are driven by fiduciary duties related to conservation and meeting investor redemptions, rather than market timing to maximize profit, thereby supporting the classification as an investment trust.

Effective Date

Rev. Proc. 2025-31 is effective for tax years ending on or after November 10, 2025.

Note: No inferences should be drawn from this Revenue Procedure regarding other Federal income tax consequences, including whether income attributable to staking would be treated as income effectively connected with a U.S. trade or business or as unrelated business taxable income.

Prepared with assistance from NotebookLM.