Whitepaper · August 2025

Tax Considerations for Earning Income on Bitcoin

By Sypher Bitcoin Yield Fund

A short memorandum on the U.S. federal income tax questions that sit underneath earning yield on bitcoin, written for holders with a low cost basis who cannot afford an accidental disposition. It evaluates each step of a staking or lending structure against the realisation rules of IRC §1001 and the IRS’s existing guidance on virtual currency and staking rewards.

The core distinction is between transformations that keep the holder’s ownership continuous and those that do not. Minting a one-to-one, fully redeemable staked token through a trust-minimised protocol is argued to be non-taxable, by analogy to wrapping ETH. Swapping bitcoin into a custodial or synthetic token issued by a third party, or allowing the underlying bitcoin to be rehypothecated, may be a taxable exchange because beneficial ownership changes hands. Staking rewards are ordinary income when received, under Revenue Ruling 2023-14.

The same logic applies to borrowing: pledging bitcoin as collateral is not itself a taxable event, but if the lender can transfer, sell or rehypothecate it, the IRS may treat the pledge as a disposition. The paper also separates the SEC’s securities-law view of liquid staking tokens from the IRS’s tax view, which are independent questions.

1. 1.Minting a 1:1 redeemable staked token: not taxable.

   No change in ownership and no exchange under §1001, provided the mechanism is trust-minimised and fully redeemable.

2. 2.Swapping into a custodial or synthetic token: likely taxable.

   A materially different asset issued by a third party, not fully redeemable, or subject to rehypothecation can be treated as a sale or exchange.

3. 3.Rehypothecation of the underlying: potentially taxable.

   Loss of dominion and control over the property can be a realisation event, even inside a loan-like arrangement.

4. 4.Redeeming the staked token: not taxable.

   Treated as a reversal of the minting where parity and continuity of ownership were maintained.

5. 5.Staking rewards: ordinary income on receipt.

   Reported at fair market value when the holder gains dominion and control (Rev. Rul. 2023-14).

6. 6.Pledging collateral: not taxable unless control is ceded.

   A lender with the right to transfer, sell or rehypothecate the collateral changes the analysis.

On this site, the same ground is covered in how bitcoin loans work, rehypothecation and lenders that do not rehypothecate.

Sypher Bitcoin Yield Fund is managed by Sypher Capital Management, LLC, which also operates Borrow on Bitcoin. The paper is provided for informational and educational purposes only and is not legal, tax, investment or other professional advice; its tax discussion is general and illustrative and is not a tax opinion. Views and figures are as of the paper's date and subject to change. Nothing on this page or in the paper is an offer to sell or a solicitation of an offer to buy any security. borrowonbitcoin.com is a comparison publisher, not a lender, broker or financial adviser. Disclosures.