- Schwartz argues that newly minted XRP staking rewards should only be taxed when sold, not when received.
- He distinguishes newly minted rewards (taxed at sale) from transferred tokens (taxed when received).
- IRS Revenue Ruling 2023-14 taxes staking rewards when received, contradicting Schwartz’s argument.
David Schwartz, Ripple’s former CTO, has reignited debate about how staking rewards should be taxed if XRP Ledger ever implements a native staking model.
His comments occurred during a conversation with crypto tax expert Clinton Donnelly about whether staking rewards should be taxed before they are sold.
The Knitted Sweater Model for XRP Staking
According to David Schwartz, the tax treatment of a staking system should be determined by how it generates and distributes rewards.
In his opinion, rewards that already exist and are transmitted to a user can be considered taxable income when received.
He designed a separate line for prizes generated through the same staking procedure that distributes them.
Schwartz remarked, “If the staking rewards are created by the staking process, then it’s just like if you knitted a sweater for sale. There’s no tax due until you sell the sweater.”
So this same reasoning should apply to new XRP staking rewards.
When the staking rewards are moved from one place to another rather than created, they should be taxed on receipt just like everything else of value is.
If the staking rewards are created by the staking process, then it's just like if you knitted a sweater for sale. There's no…
— David 'JoelKatz' Schwartz (@JoelKatz) May 28, 2026
Furthermore, this perspective creates a clear distinction between token acquisition methods.
Existing tokens are distributed by certain protocols, resulting in an immediate income tax event. Original protocols, however, do issue brand-new assets directly from XRP staking.
Hence, Schwartz maintains that these new digital assets are created property.
This classification would imply that federal tax liabilities are incurred only when assets are ultimately sold.
The concept of this theoretical model provides a defensible digital asset tax strategy for future participants in digital assets.
Theoretical XRPL Upgrades and Future XRP Staking
The discussion does not indicate that XRP Ledger now enables native staking.
XRPL does not use proof-of-stake consensus, hence holders cannot stake XRP directly on the network in the same manner that users do on networks like Ethereum.
Schwartz’s thoughts centred on how a potential architecture may function if the ecosystem ever considered a staking-like mechanism.
He stated that tax treatment would be determined by whether the awards are new or paid for by another party for a service.
This is a critical tax debate if token rewards are approved by validators.
These novel legal theories would be immediately put to the test if a successful structural upgrade were to happen.
Navigating Current IRS Revenue Rules
The IRS currently maintains a very strict stance on digital asset rewards.
Specifically, Revenue Ruling 2023-14 dictates that taxpayers owe money upon receiving tokens.
The agency rates tax liabilities once the user has the full dominion (control) over the asset.
Naturally, this rigid regulatory framework directly contradicts the latest Ripple executive proposal. The government requires immediate taxes, Schwartz says, deferred until sale.
This fundamental disagreement will inevitably lead to a clash between the developers and regulators.
The industry sorely needs clarity on the future of XRP staking moving forward.
