IRS refines safe harbor for exchange-traded trusts that stake digital assets

On October 6, 2026, the Internal Revenue Service (IRS) released Revenue Procedure 2026-20, which clarifies, modifies, and supersedes Revenue Procedure 2025-31. Revenue Procedure 2025-31 provided a safe harbor under which certain trusts that qualify as investment trusts under Treasury Regulation § 301.7701-4(c) and as grantor trusts may stake their digital assets without jeopardizing that tax status. Revenue Procedure 2026-20 responds to requests for additional clarity on the original safe harbor and gives trusts six months after October 6, 2026, to implement its requirements.

This article summarizes the key changes and their implications for sponsors, trustees, and custodians of digital asset exchange-traded products (ETPs).

Background

In a proof-of-stake network, the protocol generally uses staked digital assets to determine eligibility to participate in validating new blocks of data, and the extent of that participation. The protocol may distribute rewards of newly minted digital assets, transaction fees, or both, and some staked units may be forfeited as a penalty (slashing) if a validator node operator fails to follow the consensus mechanism. According to the Revenue Procedure, if a single validator node operator or coordinated group controlled a sufficient portion of the total staked digital assets to compromise the consensus process, it could undermine the reliability of the blockchain, while broader distribution of staked assets across independently operated validator nodes can enhance security. Owners may stake through a custodian, which holds the digital assets and contracts with one or more validator node operators (known as staking providers).

Under the Treasury Regulations, an arrangement is classified as a trust if its purpose is to vest in trustees the responsibility to protect or conserve property for beneficiaries, rather than to carry on a profit-making business. An arrangement not properly classified as a trust is a business entity. An investment trust is not classified as a trust if there is a power under the trust agreement to vary the investment of the certificate holders (i.e., a managerial power to take advantage of variations in the market to improve their investments. A person treated as the owner of an undivided fractional interest in a grantor trust is considered to own the trust assets attributable to that interest.

After receiving requests for guidance on whether staking prevents a trust from qualifying as an investment trust and a grantor trust, the US Department of the Treasury and the IRS issued Revenue Procedure 2025-31 on November 10, 2025. It provided a safe harbor with 14 requirements, all of which must be satisfied, and a nine-month period for existing trusts to amend their trust agreements. Treasury and the IRS then received requests for additional clarity on:

• The proof-of-stake protocols covered.
• The requirement that the US Securities and Exchange Commission (SEC) approve trust disclosures.
• The use of multiple custodians.
• The extent of slashing protection required.
• The unstaking and sale of digital assets in anticipation of distributions.
• The consistent treatment of staking rewards.
• Whether transactions treated as borrowing digital assets qualify as contingent liquidity arrangements.
• The scope of the safe harbor and the application of the nine-month period to trusts that had already authorized staking.

Key changes to the safe harbor

Revenue Procedure 2026-20 retains the 14 requirements of the original safe harbor. It continues to require that the trust:

• Hold only cash and a single type of digital asset whose transactions are carried out on a permissionless proof-of-stake network.
• Direct staking through one or more custodians with unrelated staking providers on arm’s-length terms.
• Make all of its digital assets available for staking at all times, subject to a liquidity reserve and other limited exceptions.

The trust agreement must also prohibit the trustee from seeking to take advantage of variations in the market to improve the investments of trust interest holders, including variations in the value of the digital assets or the amount of staking rewards.

The principal modifications compared to Revenue Procedure 2025-31 are as follows:

• SEC disclosure. Rather than requiring that the trust’s staking disclosure be “reviewed and approved by the SEC,” the safe harbor now requires that the disclosure be filed with the SEC in an effective registration statement and remain subject to the SEC’s continued oversight and jurisdiction.
• Multiple custodians. The trust’s digital assets may be held by one or more custodians. Only the custodian holding particular digital assets may access the associated private keys, and the trustee, sponsor, or that custodian must perform due diligence in selecting each staking provider with regard to those assets.
• Slashing indemnity. Where the original safe harbor required the trust’s digital assets to be “indemnified from slashing due to the activities of staking providers,” the trust now must be 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 protect against.
• Rewards and distributions. Units equal in number to the trust’s staking rewards, net of trust expenses, must be distributed in kind, sold with the proceeds distributed, or a combination of both, no more than 60 days after the end of the calendar quarter in which the trust gains dominion and control over the rewards. This replaces the original requirements that rewards be distributed no less frequently than quarterly and that the trust treat all rewards consistently; the requirements now apply equally to all rewards, whether newly minted units or transaction fees, and whether staked or unstaked. The trustee may also sell digital assets to make cash distributions, make distributions other than in redemption of trust interests, and temporarily hold unstaked digital assets in connection with those sales and distributions.
• Contingent liquidity arrangements. A trust may still enter into a cash borrowing facility or an arrangement to buy or sell digital assets on a current or deferred basis to address an adverse liquidity event affecting redemptions, but an arrangement under which the trust obtains digital assets in a transaction it treats as a borrowing of those assets for federal income tax purposes does not qualify.
• Scope and transition. The scope provision now tests whether the trust qualified as an investment trust and grantor trust immediately before satisfying all of the safe harbor requirements. This change responds to requests concerning the scope of the safe harbor and its application to trusts that had already authorized staking. Any qualifying trust may act within six months after October 6, 2026, to implement the requirements by amending its trust agreement, revising its processes and procedures, or both. A trust that has complied, and remains compliant, with Revenue Procedure 2025-31 may continue to rely on it for up to six months after October 6, 2026, after which no trust may do so. The Revenue Procedure is effective for tax years ending on or after October 6, 2026.

Practical considerations

Trusts currently relying on Revenue Procedure 2025-31 should conform their trust agreements and procedures to the modified requirements before that reliance ends, and sponsors should review their fund disclosures as well. The new window also gives trusts that did not act before the original nine-month amendment period closed in August 2026 a further opportunity to do so.

Conclusion

Revenue Procedure 2026-20 responds to the requests practitioners raised after the original safe harbor was issued, but the safe harbor remains narrow. It applies only to exchange-traded trusts holding a single type of proof-of-stake digital asset and so does not reach proof-of-work assets such as bitcoin, multiasset vehicles, or privately offered funds. The IRS also continues to express no view on whether staking income is effectively connected income or unrelated business taxable income, or on the treatment of forks and airdrops, and cautions that no inference should be drawn for trusts that fall outside the safe harbor.

If you have questions about Revenue Procedure 2026-20 or the structuring of digital asset ETPs, please do not hesitate to contact the authors of this article or your regular McDermott Will & Schulte contact(s).