Rev. Proc. 2026-20, October 6, 2026

On October 6, 2026, the Internal Revenue Service (IRS) and the Department of the Treasury issued Revenue Procedure 2026-20, which describes an administrative safe harbor for State law trusts holding digital assets. Under this guidance, an arrangement formed as a trust under applicable State law that otherwise qualifies as an investment trust under Treas. Reg. § 301.7701-4(c) and as a grantor trust under I.R.C. §§ 671 and 677 may stake its digital assets without jeopardizing its classification as a trust for Federal income tax purposes.

Revenue Procedure 2026-20 expressly “clarifies, modifies, and supersedes Rev. Proc. 2025-31, 2025-48 I.R.B. 743, to address requests received by the Department of the Treasury (Treasury Department) and the Internal Revenue Service (IRS) for additional guidance on certain aspects of Rev. Proc. 2025-31.” Following the release of the 2025 safe harbor, taxpayers and practitioners sought crucial technical clarifications regarding:

The specific proof-of-stake protocols covered under the safe harbor;
The requirement that the Securities and Exchange Commission (SEC) approve trust disclosures;
The utilization of multiple custodians in the staking workflow;
The required scope and extent of contractually mandated slashing protection;
The operational unstaking and sale of digital assets in anticipation of trust distributions;
The requirement for consistent tax treatment of staking rewards;
Whether liquidity transactions treated by the trust as borrowing digital assets qualify as contingent liquidity arrangements; and
The exact scope of the safe harbor and the operational application of the transition grace period for existing trusts that had previously authorized staking activities.

In response, Rev. Proc. 2026-20 provides an updated, definitive regulatory roadmap while extending a limited six-month grace period from October 6, 2026, for existing trusts to amend their governing instruments and operational procedures to align with the revised safe harbor requirements.

Factual Framework of Digital Asset Staking and Exchange-Traded Trusts

To evaluate the tax principles at play, the IRS established a comprehensive factual baseline regarding proof-of-stake consensus mechanisms and institutional custodial arrangements. As established in Notice 2014-21, 2014-16 I.R.B. 938, and codified in I.R.C. § 6045(g)(3)(D), “digital assets generally are treated as property for Federal income tax purposes and Federal income tax principles apply to digital asset transactions.” Revenue Procedure 2026-20 “addresses only digital assets for which transactions are carried out on a permissionless network that uses a proof-of-stake consensus mechanism to validate those transactions.”

In a proof-of-stake protocol, the blockchain network relies on cryptography and distributed consensus among unrelated validator nodes rather than designated trusted intermediaries. The IRS observed that “in a proof-of-stake consensus mechanism, the protocol generally uses staked digital assets to determine eligibility to participate in validating new blocks of data on the blockchain and the extent of that participation.” Staking represents the “exercise of the validation capabilities associated with digital assets under a relevant protocol’s rules by committing those digital assets to support the protocol’s validation process.”

From an economic and property protection standpoint, the IRS highlighted that staking directly contributes to preserving the underlying capital value of the trust’s digital assets. If voting power becomes concentrated, a single malicious validator node operator or coordinated group could compromise protocol consensus, execute double-spending transactions, and undermine public confidence in the network, causing the native digital assets to lose substantial market value. Therefore, “an increase in the amount of digital assets staked and a broader distribution of staked digital assets across independently operated validator nodes can enhance the security of blockchains that use proof-of-stake consensus mechanisms.”

In exchange for maintaining network security, proof-of-stake protocols distribute rewards consisting of newly minted digital assets, network transaction fees, or both. Conversely, if a validator node operator fails to comply with consensus rules, protocol smart contracts enforce “slashing,” resulting in the mandatory forfeiture of a portion of the staked assets.

In the institutional setting of exchange-traded products (ETPs) structured as grantor trusts, the public offering and sale of trust interests are subject to SEC registration and exchange listing rules. Under generic exchange listing standards (such as SEC Release No. 34-103995), trusts holding digital assets must maintain written liquidity risk policies and procedures. Specifically, if a trust has on a daily basis less than 85 percent of its assets readily available to meet redemption requests within one business day, it must execute formal liquidity risk procedures to avoid significant dilution of remaining unit holders’ interests.

Statutory and Regulatory Analysis of the Investment Trust and Grantor Trust Doctrines

The foundational issue addressed by the IRS is whether directing digital assets into proof-of-stake protocols constitutes a business activity or creates an impermissible “power to vary” the trust’s investment under Treasury Regulations, thereby converting an investment trust into a business entity taxable as a corporation or partnership.

Under Treas. Reg. § 301.7701-2(a), a business entity is any entity recognized for Federal tax purposes that is not properly classified as a trust under Treas. Reg. § 301.7701-4 or subject to special tax treatment. Treas. Reg. § 301.7701-4(a) provides that an arrangement is classified as a trust if its purpose is “to vest in trustees the responsibility to protect or conserve property for beneficiaries who cannot share in the discharge of this responsibility and, therefore, are not associates in a joint enterprise for the conduct of business for profit.” Conversely, under Treas. Reg. § 301.7701-4(b), commercial or business trusts created as devices to carry on profit-making businesses are classified as business entities.

For fixed investment trusts holding assets for unit holders, Treas. Reg. § 301.7701-4(c)(1) dictates that an investment trust with a single class of ownership interests representing undivided beneficial interests is classified as a trust only “if there is no power under the trust agreement to vary the investment of the certificate holders.”

In analyzing what constitutes a “power to vary,” the IRS synthesizes established judicial precedent and administrative rulings:

Managerial Exploitation of Market Fluctuations: In Commissioner v. North American Bond Trust, 122 F.2d 545 (2d Cir. 1941), cert. denied, 314 U.S. 701 (1942), the Second Circuit held that a power to vary exists where there is a managerial power under the trust instrument enabling the trustee to take advantage of variations in the market to improve the investments of the certificate holders.
Fixed Yields and Conservative Cash Management: In Rev. Rul. 75-192, 1975-1 C.B. 384, the IRS ruled that requiring a trustee to invest temporary cash in short-term government obligations or bank certificates of deposit maturing prior to quarterly distribution dates did not constitute a power to vary. Because the restrictions limited the trustee to a fixed return like a bank account and eliminated market speculation, the power did not alter the trust’s fixed investment character.
Active Business Operations vs. Passive Asset Preservation: In Rev. Rul. 78-371, 1978-2 C.B. 344, a trust authorized to buy, sell, develop, raze, and lease real estate and borrow money was held to be an association taxable as a corporation. In contrast, Rev. Rul. 79-77, 1979-1 C.B. 448 (citing Wyman Building Trust v. Commissioner, 45 B.T.A. 155 (1941)), affirmed trust classification where the trustee held title to a single parcel of real estate subject to a long-term net lease, possessing powers limited to conserving property and distributing net proceeds.
Credit Preservation and Automatic Plans: Rev. Rul. 81-238, 1981-2 C.B. 248, established that automatic reinvestment plans do not vary original trust assets. Furthermore, Rev. Rul. 90-63, 1990-2 C.B. 270, held that a trustee’s power to consent to changes in debt obligation credit support is not a power to vary if exercisable solely to maintain bond value and credit ratings. Similarly, Rev. Rul. 2004-86, 2004-2 C.B. 191, confirmed fixed investment trust status for a Delaware Statutory Trust holding net-leased real property with strictly constrained trustee authority.

Regarding grantor trust status, I.R.C. § 671 mandates that when a grantor or third party is treated as the owner of any portion of a trust, the grantor includes in computing taxable income all items of income, deduction, and credit attributable to that portion. Under I.R.C. § 677(a), a grantor is treated as the owner of any trust portion whose income may be distributed or accumulated for the grantor without the consent of an adverse party. As affirmed in Rev. Rul. 85-13, 1985-1 C.B. 184, Rev. Rul. 88-103, 1988-2 C.B. 304, and Treas. Reg. § 1.1001-2(c), Ex. 5, an owner of an undivided fractional interest in a grantor trust is considered for Federal income tax purposes to own the underlying trust assets directly.

Application of Tax Law to Staking Activities: The Safe Harbor Framework

Applying these statutory principles to digital asset staking, the IRS concluded that staking does not constitute an impermissible power to vary the trust’s investment or convert the trust into a business enterprise, provided the trust strictly adheres to fourteen detailed operational requirements set forth in Section 6.02 of Rev. Proc. 2026-20:

Exchange Listing and SEC Compliance: Trust interests must be traded on a national securities exchange complying with exchange rules and generic listing standards. Public disclosures regarding staking must be filed with the SEC in an effective registration statement subject to ongoing SEC oversight.
Single Asset Class: The trust must hold only cash and units of a single type of digital asset operated on a permissionless proof-of-stake network.
Custody and Retention of Ownership: Digital assets must be held by one or more custodians acting on the trust’s behalf at addresses controlled by the custodians. “Only the custodian can access the private keys associated with the digital asset addresses... Accordingly, only the custodian can effect a sale, transfer, or exercise the rights of ownership over the trust’s digital assets held by that custodian, including while those assets are staked. For Federal income tax purposes, the trust retains ownership of the digital assets at all times, including while they are staked.”
Protective Staking Purpose: The trust’s staking activities must serve to “protect and conserve trust property by mitigating the risk that another party or group could control a majority of the total staked digital assets of that type and engage in transactions that could reduce the value of the trust’s digital assets.”
Strict Limitation on Trustee Powers: Trustee activities must be strictly limited to administrative holding, accepting contributions, making cash or in-kind redemptions, paying trust expenses, purchasing assets with cash contributions, selling assets for liquidation, and directing staking in compliance with liquidity rules. Most importantly, “pursuant to the trust agreement, the trustee is prohibited from seeking to take advantage of variations in the market to improve the investments of trust interest holders, including variations based on the value of the digital assets or the amount of staking rewards.”
Arm’s-Length Staking Provider Contracts: Staking must be directed through custodians with unrelated third-party staking providers. The allocation of staking rewards between the staking provider and custodian must reflect an arm’s-length allocation independent of operating expenses.
Prohibition on Operational Control: Neither the trust, custodian, nor sponsor may possess any legal right or arrangement to direct, participate in, or control the activities of the staking provider, other than issuing instructions to stake or unstake.
Maximum Asset Staking Standard: All trust digital assets must be made available to be staked at all times, subject only to explicitly defined liquidity and operational exceptions.
Liquidity Reserve Rules: To comply with exchange-mandated liquidity risk rules, a trust may stake less than all its digital assets to maintain a liquidity reserve, provided the reserve is based solely on exchange redemption rules. Assets in the reserve must resume being available for staking as soon as reasonably possible.
Short-Term Temporary Unstaked Holds: The trust may temporarily hold unstaked digital assets on a short-term basis solely in connection with asset sales for expenses, interest creations/redemptions, purchases for cash, or receipt of staking rewards.
Operational Unstaked Exceptions: Unstaked holdings are also permitted in connection with contingent liquidity facilities, liquidation, network protocol protective measures (such as mitigating systemic network or smart contract vulnerabilities), cessation of custodian/staking provider contracts, or legal changes.
Contingent Liquidity Arrangements: The trust may enter into credit facilities or purchase/sale agreements to mitigate adverse liquidity events during redemptions. However, “a contingent liquidity arrangement does not include an arrangement pursuant to which a trust obtains digital assets in a transaction that the trust treats as a borrowing of those digital assets for Federal income tax purposes.”
Slashing Indemnification Requirement: “To protect or conserve the trust’s property, the trust is indemnified, in a manner consistent with the proper discharge of the trustee’s fiduciary obligations, against slashing due to activities or events reasonably within the staking provider’s control or ability to protect against.”
Staking Rewards Distribution Rules: Staking rewards received must consist solely of additional units of the same single digital asset type. Rewards (net of expenses) must be distributed in kind or sold for cash and distributed to unit holders proportionally “no more than 60 days after the end of the calendar quarter in which the trust gains dominion and control over the relevant staking rewards.”

Administrative Conclusions, Implementation Grace Period, and Reserved Issues

Revenue Procedure 2026-20 establishes definitive administrative conclusions for tax taxpayers and trustees. So long as a trust satisfies the safe harbor criteria, the trustee’s authorization to stake digital assets and the resulting staking transactions will not cause the trust to lose its classification as an investment trust under Treas. Reg. § 301.7701-4(c) or as a grantor trust under I.R.C. §§ 671 and 677.

To facilitate compliance for existing vehicles, the IRS created a limited six-month transition grace period:

“If a trust described in section 5 of this revenue procedure acts at any time within six months after October 6, 2026, to implement the requirements set forth in section 6.02 of this revenue procedure, including amending its trust agreement to authorize staking, revising its processes and procedures, or a combination of both, those actions will not prevent the trust from being treated as a trust that qualifies as an investment trust under § 301.7701-4(c) or as a grantor trust.”

Furthermore, trusts complying with Rev. Proc. 2025-31 may continue relying on that prior safe harbor during this six-month grace period, after which reliance on Rev. Proc. 2025-31 is permanently revoked. Rev. Proc. 2026-20 is formally effective for tax years ending on or after October 6, 2026.

Finally, the IRS explicitly restricted the legal scope of the ruling under Section 7. Tax practitioners must note that no inferences should be drawn regarding trusts operating outside this safe harbor or regarding unaddressed tax issues. Specifically, the IRS noted that “no inferences should be drawn as to any Federal income tax consequences not expressly addressed in this revenue procedure, including with respect to whether income attributable to staking would be treated as income effectively connected with the conduct of a trade or business within the United States or as unrelated business taxable income,” nor regarding the tax treatment of forks or airdrops.

Prepared with assistance from Gemini Notebook.