Crypto Staking: How Is It Beneficial? How Is It Taxed In India? All Your FAQs Answered

In India, your staking income is subject to a 30 per cent tax. This is what investors should keep in mind when they deposit their tokens for staking.

Remember the Ethereum upgrade in 2022 that no one would stop talking about for weeks? That’s because the second largest token by market capitalisation, which started with the Proof of Work (PoW) consensus mechanism, following in Bitcoin’s footsteps, completed its transition to Proof of Stake (PoS), a less energy-intensive process. This would mean that energy consumption of mining new tokens on the network can be done away with and instead of solving complex mathematical problems using computational resources, investors could simply stake their tokens to keep the network running securely and efficiently.   

The staking contract on Ethereum came about with the launch of the Beacon chain. The community supported and showed enthusiasm around this development and the network saw a deposit of 8,80,000 ETH in deposits for staking purposes even though there was no definite deadline on when withdrawals could start taking place on the same. However, the promise of the technology and the motivation to keep the network running with better scalability, made the community commit to this technology.

What Is Staking?

If one were to explain staking in traditional finance terms, it is similar to fixed deposits where you keep your money in a fund for a specific period or do not withdraw it and in return, the bank pays you a certain amount of interest. In staking, you similarly earn rewards in crypto for depositing your tokens in the network to keep it running smoothly. To validate transactions on the network and create new blocks, participants stake their tokens, which is known as the staking process.  

How Is Staking Beneficial?

Considering staking only for the Ethereum network for easy reference, according to Blocknative’s earning analysis calculator, if you were to stake 10 ETH today, a year from now, you would have a 3.95 per cent return on the same, i.e. $1,154.70.

Ethereum staking rewards depend on factors such as the duration of the stake, the protocol of the network related to staking, etc. Suppose you have less Ethereum to stake. It would be beneficial for you to join a staking pool to gain rewards and not lose a lot on your staked income. This can be done by liquid staking pools such as Lido, or Rocket Pool.

What Is Liquid Staking?

Liquid staking tokens were introduced to reward the stakes in more ways than one. Upon staking crypto, users get tokens as a receipt which can be further used on other DeFi apps to earn rewards in different forms.

Liquid staking protocols allow users to have access to their staked tokens. Most importantly, you can join a liquid staking pool if you have less number of tokens to stake, to earn substantial rewards without compromising on total yields. If an investor stakes 2 ETH tokens through a liquid staking protocol with a 10 per cent staking fee, he/she would earn a 16.69 per cent return over a year. The entry barriers to such pools are low considering all participants pool their resources to meet the minimum network requirement for staking.

To get started on your staking journey, you need to research the tokens which allow staking and have been around for a while with some promising use cases. Ethereum, Cardano and Solana are a few of them. Staking platforms is crucial as well, You need to be apprised of rewards, lock-in periods, etc. Most exchanges will allow you to stake tokens without any manual calculation on your part. It’s best to choose one that is compliant with Indian regulations and has an easy interface which makes staking as easy as transactions. 

Is Staking Subject To Tax?

According to the Indian tax laws, your staking income is subject to a 30 per cent tax. This is what investors should keep in mind when they deposit their tokens for staking. Additionally, factors such as liquidity crunch, validator requirement changes, lock-in period, and network protocols should be thoroughly researched before investors consider staking.

As compared to HODLing, staking will provide you an advantage in multiplying the number of tokens you hold. So if the price of the tokens fluctuates or there is an unprecedented event that reduces individual token prices, you could still be at an advantage if you have more tokens which essentially means that your portfolio value will be higher as compared to just owning HODLed coins. 

Engaging in cryptocurrency staking provides cryptocurrency owners with a unique source of income beyond simply trading coins. Although the earned income can be a rewarding benefit of holding a coin, it's crucial to study the market conditions before engaging in staking activities. The positive aspects of staking, including potential rewards and income, offer a viable opportunity for investors in the dynamic cryptocurrency market.

(The author is the Vice President of crypto investment platform WazirX)

Disclaimer: Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions. Cryptocurrency is not a legal tender and is subject to market risks. Readers are advised to seek expert advice and read offer document(s) along with related important literature on the subject carefully before making any kind of investment whatsoever. Cryptocurrency market predictions are speculative and any investment made shall be at the sole cost and risk of the readers.