Alvie N. Paschall and Patricia C. Paschall v. Commissioner of Internal Revenue, T.C. Memo. 2026-46 (June 4, 2026)

The litigation in Paschall v. Commissioner involves the tax treatment of cryptocurrency staking rewards received during the 2021 tax year. The petitioners, Alvie and Patricia Paschall, held Cardano tokens within an account on the digital asset platform eToro USA, LLC. As part of eToro's service, these Cardano tokens were staked via a proof-of-stake protocol. The court found that while the customers could opt out of the staking service, Mr. Paschall’s tokens were staked for the entirety of the 2021 tax year.

As a result of this staking, additional Cardano tokens were credited to Mr. Paschall’s account on a monthly basis. These rewards were "indistinguishable from the existing tokens in his account," and although eToro temporarily restricted the transfer of these tokens to other platforms due to an intent to delist Cardano, Mr. Paschall maintained the ability to sell the tokens for cash at any time. The total value of the staking rewards reported by the IRS via Form 1099–MISC was $33,354.

Taxpayer Arguments for Relief

The petitioners sought relief from a deficiency assessment by asserting several theories to argue that the staking rewards should not have been included in their gross income upon receipt. Their arguments rested on three primary legal pillars:

First, the petitioners argued that they lacked dominion and control over the tokens due to transfer restrictions imposed by eT/oro.
Second, they contended that the staking rewards were analogous to a pro rata stock dividend, which under Eisner v. Macomber, 252 U.S. 189 (1920), represents a mere accretion in value rather than taxable income.
Third, they posited that the rewards constituted "self-created property," suggesting that much like the products of a baker or writer, such assets should only be taxed upon realization through sale.

Judicial Analysis of Dominion and Control

In evaluating whether the staking rewards constituted gross income under Internal Revenue Code section 61, the court focused on the principle of dominion and control. The court reiterated the expansive nature of gross income, noting that it includes "all accessions to wealth realized and over which the taxpayer has complete dominion and control" (citing Commissioner v. Glenshaw Glass Co., 348 U.S. 426 (1955)).

The petitioners’ argument regarding the inability to transfer tokens to external wallets was rejected. The court found that because Mr. Paschall could convert the tokens into cash at any time, his access to wealth remained unimpeded. In applying well-established precedent, the court noted, "As the Supreme Court noted in Helvering v. Horst, 311 U.S. 112, 118 (1940), the 'power to dispose of income is the equivalent of ownership of it.'" The court further emphasized that even if the tokens were only convertible to cash rather than other assets, this "did not reflect a lack of ownership or control."

Rejection of the Stock Dividend Analogy

The court also addressed the petitioners' attempt to apply the doctrine established in Eisner v. Macomber. The petitioners argued that because the rewards were distributed in proportion to their holdings, they should be treated as non-taxable stock dividends. However, the court distinguished the facts of this case from the precedent.

Crucially, a tax-free stock dividend "really take[s] nothing from the property of the corporation and add[s] nothing to that of the shareholder" (Eisner v. Macomber, 252 U.S. 189). In contrast, the court found that the Cardano staking rewards "increased his proportion of all outstanding Cardano tokens" and increased the overall value of his interest. The court concluded that the distribution of these rewards "increased the supply and aggregate value of Cardano in circulation," thereby creating a taxable accession to wealth.

Analysis of Self-Created Property Theory

Finally, the court addressed the petitioners' theory that staking rewards are "self-created property" akin to a baker’s cake or a writer’s book. The petitioners argued these were products of labor and capital that should only be taxed upon disposition.

The court found this analogy fundamentally flawed. Unlike a baker or a writer, stakers do not personally manufacture the asset; rather, they participate in a protocol-driven process. The court explicitly stated, "Stakers do not create anything by themselves," noting that it is the underlying cryptocurrency's protocol that grants tokens to stakers in exchange for validation. Because the petitioners were neither owners nor operators of the staking pool, they lacked the power to decide when or if the property was created.

Final Determination

The court concluded that the staking rewards were indeed taxable upon receipt in 2021. The decision rested not on recent revenue rulings issued after the year in question, but on the fundamental application of section 61 and established caselaw regarding the realization of income through dominion and control. The court held that the fair market value of the rewards was includible in gross income because the taxpayers had the power to enjoy the wealth at their own option.

Prepared with assistance from LM Studio google/gemma-4-26b-a4b.