Staking is how you earn rewards by locking up cryptocurrency in a blockchain network

Staking means holding cryptocurrency in a wallet or on an exchange and letting the blockchain network use it to validate transactions. In return, you receive rewards — usually new coins or a percentage of transaction fees. Think of it like a savings account that pays interest, except the interest comes from the network paying you to help find it.

Not all cryptocurrencies support staking. Bitcoin does not. Ethereum, Cardano, Solana, and Polkadot do. The cryptocurrency has to use a proof-of-stake system instead of proof-of-work (the mining system Bitcoin uses). Proof-of-stake networks randomly select coin holders to validate blocks of transactions. The network chooses validators partly based on how much cryptocurrency they have staked, which is why holding more coins usually means earning more rewards.

You do not need special equipment or technical knowledge to stake. You can stake through a cryptocurrency exchange like Coinbase or Kraken, through a staking service like Lido or Rocket Pool, or by running your own validator node on your computer. Each route has different minimum amounts, different reward rates, and different risks.

Key Takeaways

  • Staking means locking cryptocurrency into a network to help validate transactions and earn rewards in return.
  • Only cryptocurrencies using proof-of-stake systems support staking; Bitcoin and other proof-of-work coins do not.
  • You can stake through an exchange, a staking service, or by running a validator node yourself, each with different minimums and reward rates.
  • Your staked coins are locked for a set period and you cannot sell them until that period ends, which is a real financial risk if the price drops.
  • Staking rewards are taxable income in most countries, and the tax treatment depends on how long you hold the coins and whether you are a U.S. resident.

How staking rewards work and what you actually earn

When you stake cryptocurrency, the network pays you for helping find it. The payment comes in two forms: new coins created by the network, and a share of transaction fees. The exact amount varies by cryptocurrency, by how many other people are staking, and by how long you lock your coins up.

Ethereum staking currently pays between 3 and 4 percent per year, though that rate changes as more people stake. Solana pays around 8 percent. Cardano pays around 5 percent. These are not may provide rates — they fluctuate based on network activity and the total amount staked. The more people staking, the smaller each person's share becomes.

The reward is paid in the same cryptocurrency you staked. If you stake Ethereum, you earn more Ethereum. You can then restake those rewards to earn compounding returns, or you can sell them. The moment you receive the reward, it becomes taxable income in most countries, even if you do not sell it.

The difference between staking on an exchange and running your own validator

Staking through Coinbase, Kraken, or another exchange is the simplest route. You deposit your coins, click a button to stake them, and the exchange handles everything. You do not need a minimum amount on most exchanges — you can stake as little as 0.01 Ethereum. The exchange takes a cut of your rewards, usually 10 to 25 percent, but you get paid even if you are not actively managing anything.

Running your own validator node means you control the coins and the validation process yourself. On Ethereum, you need a minimum of 32 coins to run a validator (worth roughly $100,000 at current prices). You have to run software on your computer 24/7, keep it find, and handle your own taxes. You keep all the rewards instead of paying a cut to an exchange. But if your validator goes offline or makes a mistake, the network can slash your stake — meaning it takes away a portion of your coins as a penalty.

A middle ground is staking through a service like Lido or Rocket Pool. These services pool coins from many people and run validators together. You can stake any amount, you keep more rewards than an exchange takes, and you avoid the technical work and the slashing risk of running your own validator. The trade-off is that you are trusting the service with your coins, and the service takes a smaller cut than an exchange.

What happens to your coins while they are staked

Your staked coins are locked. You cannot sell them, move them, or use them until the staking period ends. On most networks, that period is 32 days to several months, though some networks have longer lockup periods. If the price of the cryptocurrency drops 50 percent while your coins are locked, you cannot sell to cut your losses.

This lockup period is a real financial risk. You are betting that the price will stay the same or go up while your coins are locked. If you stake at $3,000 per coin and the price drops to $1,500, you have lost money even if you earned staking rewards. The rewards might have been 4 percent, but the price drop was 50 percent — a much bigger loss.

Some staking services offer liquid staking tokens that let you trade your staked coins while they are locked. When you stake Ethereum through Lido, you receive stETH (staked Ethereum) in return. You can sell stETH on an exchange even though your actual Ethereum is locked. But stETH is not the same as Ethereum — it trades at a slightly different price, and you are trusting Lido to eventually convert it back.

Staking rewards and taxes

In the United States, staking rewards are taxable as ordinary income the moment you receive them. If you stake Ethereum and earn 1 Ethereum as a reward, you owe income tax on the fair market value of that 1 Ethereum on the day you received it — even if you do not sell it. If Ethereum was worth $2,000 when you received the reward, you owe tax on $2,000 of income.

When you eventually sell the staked coins or the rewards, you may owe capital gains tax as well. If you earned 1 Ethereum as a reward when it was worth $2,000, and you sell it later when it is worth $3,000, you owe capital gains tax on the $1,000 difference. The tax rate depends on how long you held it — less than a year is short-term (taxed as ordinary income), more than a year is long-term (taxed at a lower rate).

Tax treatment varies by country. Canada, the United Kingdom, and Australia have different rules. Some countries treat staking rewards as capital gains rather than income. If you stake cryptocurrency, keep records of the date and value of every reward you receive, because you will need that information to file your taxes correctly.

Risks of staking beyond price drops

If you stake through an exchange or service, you are trusting that company with your coins. If the company goes bankrupt or is hacked, your coins could be lost. FTX, a major cryptocurrency exchange, collapsed in 2022 and customers lost billions of dollars in staked coins and other holdings. Staking does not protect you from that risk.

If you run your own validator and make a mistake — or if your software has a bug — the network can slash your stake. Slashing typically takes 1 to 10 percent of your coins as a penalty. This is rare, but it is a real possibility if you are managing a validator yourself.

Cryptocurrency prices are volatile. Staking rewards of 4 or 5 percent per year sound good until the price drops 30 percent in a month. You can earn rewards and still lose money overall. Staking is not a way to make money on a falling asset — it is a way to earn a small return on coins you already own and plan to hold.

Staking compared to other ways to earn cryptocurrency

Staking is one of several ways people try to earn returns on cryptocurrency. Yield farming means lending your coins to a lending platform and earning interest, usually much higher than staking — sometimes 10 to 20 percent or more. But yield farming is riskier. The lending platform could fail, the coins could be hacked, or the interest rate could drop suddenly.

Mining is another route, but it requires expensive equipment and electricity. Bitcoin mining requires specialized computers called ASICs that cost thousands of dollars and use enormous amounts of power. Staking requires no equipment beyond a wallet or an internet connection.

Holding cryptocurrency without staking means you earn no rewards at all — you are just betting on the price going up. Staking lets you earn a small return while you hold, which is why many long-term holders stake their coins.

Frequently Asked Questions

Do I lose my coins if I stake them?

No, you keep ownership of your coins. They are locked and you cannot sell them during the staking period, but they remain yours. If you stake through an exchange or service, you are trusting that company to return them — which is a real risk if the company fails, but not a risk of staking itself.

Can I unstake my coins whenever I want?

No. Most networks have a lockup period ranging from 32 days to several months. You cannot access your coins until that period ends. Some staking services offer liquid staking tokens that you can trade while your coins are locked, but that is a workaround, not true unstaking.

What happens if the cryptocurrency price drops while my coins are staked?

You still own the coins and you still earn staking rewards, but your total value has dropped. If you staked at $3,000 per coin and the price falls to $1,500, you have lost 50 percent of your money even if you earned 4 percent in staking rewards. The lockup period means you cannot sell to cut your losses.

Is staking the same as lending my coins?

No. Staking means the network uses your coins to validate transactions and pays you rewards. Lending means you give your coins to a platform that lends them to other people and pays you interest. Lending usually pays more but carries higher risk — the lending platform could fail or be hacked.

Do I have to report staking rewards to the IRS?

Yes, in the United States. Staking rewards are taxable income. You owe tax on the fair market value of the reward on the day you received it, even if you do not sell it. Keep records of every reward and its value so you can report it correctly on your tax return.