New safe harbor helps qualifying trusts preserve tax classification
On Oct. 6, 2026, the IRS released Rev. Proc. 2026-20. This revenue procedure provides certainty that qualifying digital asset trusts may engage in proof-of-stake staking activities without jeopardizing their status as investment trusts or grantor trusts for federal income tax purposes.
By establishing a defined safe harbor and transition period for existing trusts, the IRS seeks to resolve longstanding questions surrounding the treatment of staking activities within trust structures holding digital assets.
Background on investment trusts and digital asset staking
For federal income tax purposes, a trust generally exists when a trustee holds and conserves property for beneficiaries, while an investment trust may qualify as a trust only if it lacks the power to vary the investments of its beneficial owners. This distinction is important because active investment management can cause an arrangement to be treated as a business entity rather than a trust.
The rapid adoption of digital assets and proof-of-stake blockchain networks has created uncertainty regarding whether staking activities could cause a trust holding digital assets to lose its classification as an investment trust for federal income tax purposes. Under existing tax principles, an investment trust generally cannot possess the ability to vary the investments of its beneficiaries. As a result, taxpayers and sponsors of digital asset trusts have been seeking guidance on whether staking constitutes prohibited investment activity or an impermissible business operation.
In response to those concerns, the IRS first issued Rev. Proc. 2025-31 and subsequently Rev. Proc. 2026-20. The IRS concluded that, under specified circumstances, staking can be viewed as protecting and conserving trust property rather than managing investments. Accordingly, the latest revenue procedure establishes a safe harbor allowing qualifying trusts to engage in staking while preserving their status as investment trusts and grantor trusts for federal income tax purposes
How the Rev. Proc. 2026-20 safe harbor works
Under the safe harbor, a trust that otherwise qualifies as an investment trust under Reg. section 301.7701-4(c) and as a grantor trust may stake digital assets without jeopardizing its classification for federal tax purposes. Specifically, the revenue procedure establishes that, if certain requirements are met, a trustee's authorization of staking activities and the resulting staking of a trust's digital assets will not by itself prevent the trust from qualifying as an investment trust or grantor trust.
This guidance applies to trusts holding digital assets transacted on permissionless blockchain networks that use a proof-of-stake consensus mechanism. A permissionless blockchain network is a decentralized network that allows users to freely participate in transaction validation and staking activities without requiring authorization from a central administrator. The IRS expressly acknowledges that staking activities may serve to protect and conserve trust property by supporting the security and reliability of the underlying blockchain network.
The guidance also provides significant transition relief to existing trusts by granting a six-month period to amend trust agreements, revise operational procedures and implement other changes necessary to satisfy the updated requirements. During this transition period, trusts that complied with Rev. Proc. 2025-31 may continue to rely on the earlier safe harbor while implementing the revised framework.
In addition, the new revenue procedure clarifies several issues the public raised following the issuance of Rev. Proc. 2025-31, including for example the use of multiple custodians, the treatment of staking rewards, liquidity management practices, contingent liquidity arrangements, slashing protection and the availability of transition relief for existing trusts. Rev. Proc. 2026-20 clarifies, modifies, and supersedes Rev. Proc. 2025-31 on these issues.
Qualifying for the safe harbor
Rev. Proc. 2026-20 contains certain substantive requirements that a digital-asset-staking trust must satisfy to qualify for the safe harbor and to continue qualifying for federal income tax purposes as an investment trust under section 301.7701-4(c) or as a grantor trust. Collectively, these requirements are intended to ensure that staking activity remains ancillary to the trust's purpose of holding and conserving assets, rather than constituting active investment management or business operations. The requirements are as follows:
- National securities exchange requirement: The trust's interests must be traded on a national securities exchange. In addition, the trust must comply with applicable exchange rules, SEC disclosure requirements, and written liquidity risk policies and procedures. The trust's staking activities must be disclosed in an effective registration statement that remains subject to SEC oversight.
- Single-asset trust requirement: The trust may hold only cash and a single type of proof-of-stake digital asset. The revenue procedure does not extend safe-harbor treatment to trusts holding multiple digital assets or diversified digital asset portfolios.
- Custody and ownership requirements: The trust must always retain ownership of the digital assets, including while the assets are staked. Assets must be held by one or more custodians that control the associated private keys, and only those custodians may exercise ownership rights over the assets.
- Protection and conservation of trust property: The trust’s staking of its digital assets must 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.
- Limitations on trustee authority: The revenue procedure provides a narrow list of permissible activities for the trustee relating to digital assets. The trustee may accept contributions, hold assets, pay expenses, facilitate redemptions and distributions, liquidate assets when necessary and direct staking activities consistent with the safe harbor.
- Use of independent staking providers: Staking generally must be conducted through independent custodians and staking providers operating under arm's-length contractual arrangements. The trust, its sponsor and its custodians may not direct or control the day-to-day operations of the staking provider beyond directing the staking or unstaking of assets. Generally, all of the digital assets of the trust are made available to one or more staking providers to be staked at all times. The revenue procedure also requires customary due diligence and arm's-length economics between the parties.
- Liquidity management responsibilities: The revenue procedure recognizes that a trust may need to maintain liquidity to meet redemption requests and satisfy exchange requirements. Accordingly, the trust may maintain a liquidity reserve consisting of unstaked assets and may temporarily hold additional assets outside staking arrangements under specified circumstances, including redemption activity, purchases and sales of digital assets, custodial transitions and certain security-related events.
The trust also may enter into certain limited contingent liquidity arrangements, such as borrowing cash or entering into arrangements to purchase or sell digital assets, when necessary to address liquidity needs. However, such arrangements must not include any arrangements treated as borrowing digital assets for federal income tax purposes.
- Indemnification provisions: 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 prevent. This requirement helps protect investors against avoidable validator errors and similar operational failures.
- Distribution of staking rewards: Finally, the only assets that may be received as a result of staking are additional units of the same digital asset already held by the trust. Staking rewards, net of trust expenses, must generally be distributed to trust holders in kind, sold and distributed for cash, or distributed through a combination of both methods. These distributions must occur no later than 60 days after the end of the calendar quarter in which the trust obtains dominion and control over the rewards.
