The IRS Safe Harbor: Institutional Clarity for the Next Phase of Staking

A Defining Moment for Institutional Staking

On 8 November 2025, the U.S. Internal Revenue Service (IRS) released Revenue Procedure 2025-31, creating a long-awaited safe harbor that allows digital-asset investment trusts, including potential exchange-traded funds (ETFs), to stake crypto while preserving their favourable tax treatment as investment trusts or grantor trusts. Learn more about staking as the cornerstone for ETFs and treasury strategies, and link it to this article:

This is more than a technical tax ruling. It marks a turning point for digital assets in regulated finance, confirming that staking, when properly structured, can operate within the same legal and fiscal principles that govern traditional financial products.

For the first time, the IRS has formally recognised that staking can be a passive, compliant, and non-managerial activity, paving the way for regulated funds to participate in network security while maintaining their tax status.

The Problem Before the Safe Harbor

Before this safe harbor, issuers, custodians, and ETF sponsors faced a serious structural dilemma.
Under longstanding IRS doctrine, a trust could only retain its investment trust classification if it was entirely passive, merely holding assets without exercising managerial discretion.

If a trust staked its assets, the IRS could argue that it was engaging in an active trade or business, resulting in:

1. Double taxation:
   Investment and grantor trusts enjoy pass-through tax treatment. Reclassification as a business entity would subject the trust to tax both at the entity level and again upon investor distribution.
   This effectively destroyed the economic logic of a trust-based ETF model.
2. Regulatory disqualification:
   SEC filings explicitly describe these vehicles as passive.
   Any activity resembling “management”, such as running validators or reinvesting rewards, risked invalidating their registration basis.

The lack of clarity meant most U.S. issuers simply avoided staking altogether, even as their peers in Europe integrated it into regulated fund structures. The opportunity cost was significant: U.S. investors were excluded from earning native protocol rewards in the safest possible format.

The Legal Context: Convergence Between the SEC and IRS

The IRS’s Revenue Procedure 2025-31 is not an isolated event. It is the culmination of a broader regulatory evolution across 2025, what I view as the final alignment between the Securities and Exchange Commission (SEC) and the IRS on how staking fits into existing law.

On May 29, 2025, the SEC’s Division of Corporation Finance issued its Statement on Certain Protocol Staking Activities (Learn more about “SEC’s Protocol Staking Clarification: Legal Insights for Institutional Engagement"). Before that, the industry faced a fundamental legal question: could staking itself be considered a securities offering? Under the Howey test, many worried that validator or staking-service arrangements could be viewed as “investment contracts,” potentially triggering registration obligations. The May 29 guidance resolved this. It confirmed that staking conducted at the protocol level, where token holders delegate to validators in a ministerial, non-promotional, and non-discretionary way, does not constitute a securities offering. This was transformative. It legally separated staking for network consensus from staking-as-a-service models that might involve managerial promises or profit sharing. In my view, this was the single most important interpretative step the SEC has taken on digital assets since the spot crypto ETF approvals. Although it took the form of a statement rather than a rule, it nonetheless delivered critical legal clarity: staking, when properly structured, is a network function, not a financial product. Absent that clarification, the subsequent regulatory reforms could not have been implemented. 

On July 29, 2025, the SEC went further, approving In-Kind Creations and Redemptions for Crypto Exchange-Traded Products (ETPs). Previously, these ETPs could only issue and redeem in cash, forcing authorised participants to buy or sell crypto on the open market.
This created friction, volatility, and constant taxable events and made staking operationally impossible, since assets were perpetually moved on and off chain. The July order solved this by allowing in-kind creations and redemptions, direct transfers of digital assets between the fund and its authorised participants.
It eliminated a key operational bottleneck and made on-chain asset management feasible within ETF custody structures. 

Then, on September 17, 2025, the SEC approved rule changes by three national securities exchanges adopting generic listing standards for commodity-based ETPs and expressly including digital assets as “commodities.”
Before this, each crypto ETP required bespoke approval, a process that stifled innovation.
The September rule changes created a uniform, predictable framework for listing digital-asset ETPs, the same structure used for gold and oil ETFs.

In effect, these three SEC actions resolved the core barriers that had kept staking out of public markets:

• The May 29 guidance solved the legal classification issue: staking is not, by itself, a securities offering.
• The July 29 order solved the operational issue: ETPs can now hold assets on-chain and manage staking positions.
• The September 17 rule changes solved the listing and categorisation issue: digital-asset ETPs can trade as commodity products under standard rules.

With those foundations in place, the IRS’s November 8 safe harbor completes the architecture by confirming that staking conducted within this framework is passive and tax-efficient.
Together, they form a coherent legal and fiscal regime for institutional staking in the United States, a regime that simply did not exist a year ago.

What the IRS Safe Harbor Does

The IRS safe harbor sets out fourteen detailed requirements designed to ensure that staking by an investment or grantor trust remains passive, transparent, and custodially segregated. Together, they form the operational blueprint for compliant institutional staking in the U.S.

Rather than introducing sweeping new rules, it sets out a framework that formalises what responsible participants like Twinstake and our institutional partners have already been advocating.

The most important elements for clients are:

• Independence of staking providers. Staking must be carried out through one or more operators that are completely unrelated to the trust sponsor, custodian, or their affiliates, under arm’s-length commercial agreements. This independence requirement eliminates conflicts of interest and ensures staking remains a passive third-party service, exactly the model on which Twinstake is built. In my interpretation, this guidance makes it significantly more challenging for custodians to U.S.-listed investment trusts who also provide custody services to offer staking services to those same clients under the safe harbor. Doing so would, in most cases, appear inconsistent with the independence requirement. This clarification effectively separates custody from staking operations in practice, reinforcing the need for independent, non-custodial providers like Twinstake. 
• Custody and control separation. A regulated custodian must hold the digital assets and control the private keys. The staking provider never takes possession of the assets. This separation mirrors the governance standards institutional investors expect in traditional markets, providing operational security and audit clarity.
• Passive network participation only. Staking is recognised as a network-security function, not a profit-seeking activity. Trusts cannot “manage” their positions, chase yields, or vary investments based on market movements. This ensures that staking remains a technical process, securing the network, rather than a trading strategy.
• Consistent and transparent reward treatment. Any rewards received must be in the same digital asset being staked and must be distributed or sold for cash at least quarterly. This removes uncertainty around income recognition and aligns staking rewards with traditional fund-distribution models.
• Liquidity and protection standards. Trusts may maintain a liquidity reserve to meet redemption requirements and must have slashing protection or insurance in place, providing operational resilience and investor safeguards.

Collectively, these provisions enshrine the core principle that staking can be safe, passive, and fully compatible with institutional compliance expectations.

From Twinstake’s standpoint, this framework validates our model: a non-custodial, independent infrastructure provider supporting regulated entities without ever taking control of client assets.

It is a strong confirmation that the path to compliant, large-scale staking in the U.S. now runs through precisely the standards Twinstake has followed since inception.

Balancing the Positives and the Limits

The safe harbor is intentionally narrow, limited to single-asset, permissionless networks and excluding restaking or complex DeFi activity.
Yet this is precisely its strength: it provides legal certainty and tax predictability, two conditions institutional investors prize above all else.

The benefits are considerable:

• It eliminates the risk of double taxation.
• It validates independent providers as the compliant model.
• It aligns SEC and IRS doctrine around passivity and segregation.
• And it sets the stage for a wave of staking-capable ETFs and trusts.

The Transition Period

The safe harbor applies to tax years ending on or after 10 November 2025, with a nine-month transition period, until 10 August 2026, for existing products to comply. This window gives issuers time to amend trust deeds, onboard independent providers, and implement compliant reporting.

In my view, this period will define the next competitive phase of the market. ETF sponsors and custodians that act early will gain a structural advantage; those that delay risk missing the first wave of institutional staking adoption.

Twinstake is already supporting institutions in this process, providing pre-approved, regulator-aligned onboarding frameworks that meet both SEC and IRS requirements..

‍Conclusion

I see this as the moment when U.S. digital-asset regulation achieved coherence.
The SEC has clarified what staking is not  a securities offering , while the IRS has clarified what staking is: a passive, custodial activity.
Together, they have closed the interpretive gaps that for years made institutional participation in staking legally untenable.

The sequence of 2025 reforms collectively builds the complete U.S. framework for institutional staking. In practical terms, this means the industry finally has the conditions it needs to move forward confidently:

• The May 29 SEC guidance resolved the legal question.
• The solved the operational barrier.
• The September 17 approvals fixed the classification and listing barrier.
• And the November 8 IRS safe harbor resolved the tax barrier — preventing double taxation and enshrining passivity.

With these pillars in place, staking has entered the institutional mainstream. This combination is what institutional markets were waiting for. It allows staking to evolve from a grey-area activity into a recognised, regulated mechanism for earning on-chain yield, embedded within established investment structures. 

The new IRS framework also draws a clear structural line: custody and staking must remain separate. Custodians who directly run validators for their own clients will not be able to perform that function within investment-trust structures, reinforcing the need for independent, specialist operators.

At Twinstake, we welcome this clarity. It validates our founding approach, independence, transparency, and rigorous compliance and positions us as the natural infrastructure partner for custodians, ETF sponsors, and asset managers preparing to stake under this new era of regulation.

Disclaimer

This publication is intended for professional and institutional investors only and is provided for informational purposes. It does not constitute legal, tax, accounting, or investment advice. The information herein is based on sources believed to be reliable at the time of writing, but Twinstake makes no representation or warranty as to its accuracy, completeness, or timeliness. Regulatory interpretations are subject to change. Readers should not act on the basis of this publication without seeking specific legal or investment advice from qualified professionals. The views expressed are those of Twinstake as of November 2025 and may evolve as regulatory interpretations develop.