The Jito Foundations Second Legal Analysis of The Taxation LSTs - What Stakers Need to Know
The Jito Foundation’s Second Legal Analysis of The Taxation LSTs - What Stakers Need to Know
The Jito Foundation just released its second legal analysis regarding how liquid staking tokens should be treated for tax purposes. The argument - authored by David Forst, Sean McElroy & Matt Dimon at Fenwick & West - highlights several key points that all holders of jitoSOL should be aware of.
This article discusses the main points of the analysis, what the tax implications are, and why this matters for SOL stakers.
Liquid Staking 101
The adoption of JitoSOL has exploded in the past 2 years, and may offer significant tax advantages in comparison to traditional staking methods.
Liquid staking refers to the process of staking SOL by depositing it into a smart contract in return for an LST (e.g., JitoSOL). The JitoSOL serves as a transferable receipt that tracks your deposited SOL tokens + the rewards that it has accrued. In other words, the rewards accrue to the JitoSOL token under the hood.
This is in contrast to the traditional method of staking SOL directly with a validator and periodically receiving staking rewards as they are deposited directly into your wallet.
Argument #1: Minting & Redeeming JitoSOL is Not a Taxable Event
The first main argument that Fenwick & West make in their analysis is that minting JitoSOL is NOT a taxable event. They specifically reference the Benefits and Burdens Test (§1001), which is a legal framework for determining who is the owner of a specific piece of property.
Essentially, the argument boils down to this: When a user mints JitoSOL, they never give up ownership of the underlying asset (SOL), and therefore, no exchange or taxable event has taken place.
JitoSOL can be thought of as a receipt that can be redeemed for the underlying asset at a later date, similar to receiving a ticket at a coat check.
Argument #2: Staking Rewards Shouldn’t Be Taxed Until They Are Sold
Fenwick & West’s second main argument is that staking rewards should not be taxed upon receipt, but instead should only be taxed once rewards are disposed of. This argument applies to staking rewards in general (for traditional stakers) and to owners of JitoSOL.
The central point of this argument is that staking rewards are not received from a counterparty, they are newly created property. Rewards are brand-new SOL that you own for the first time, and creation isn’t taxed as income.
Think of it like this: A tailor isn’t taxed when they sew a new shirt, they’re taxed when they sell it to a customer. This same treatment should apply to stakers.
Later, when the staker sells, swaps, or otherwise disposes of the rewards or the LST, they should be subject to capital gains tax on realized profits.
Fenwick & West also critique the IRS’s Rev. Rule 2023-14, saying that it ignores “realization” and fails to address newly created tokens.
Applying the Rules to JitoSOL Holders
The Jito Foundation’s analysis can be boiled down to a few key points:
Minting JitoSOL is not taxable: Minting is not equivalent to selling, swapping, or disposing of SOL. It’s a deposit, and JitoSOL is a receipt token.
Redeeming JitoSOL is also not taxable: Pulling SOL + rewards out of the pool is also non-taxable; you’ve just reclaimed what you already owned.
Selling JitoSOL on a DEX: This is a taxable event, and a gain/loss should be measured against the cost basis of your SOL.
No pass-through entity: The pool is software, not a partnership or trust, so no K-1s or pooled income allocations apply.
It’s also worth noting that this analysis specifically addresses minting and redeeming JitoSOL. If you instead elect to swap between SOL and JitoSOL on a DEX, these arguments most likely do not apply.
Practical Takeaways
Stakers must keep detailed records of their full transaction history - including dates, amounts, and cost basis - especially if they want to apply these rules to their reporting methods. Holders of JitoSOL should keep in mind that this is just a legal argument; it is not binding law. The IRS could disagree and have a different opinion on how staking rewards and LSTs are taxed.
7. Caveats & Open Questions
The taxation of staking rewards remains a grey area in the United States. This is a young, evolving industry, and we’re likely to see further evolution of how staking rewards are treated in the coming years.
Stakers, and crypto users in general, should stay tuned for updates from the IRS, or similar legal arguments that could effect crypto taxes moving forward.
Other jurisdictions around the world may have completely different interpretations of staking rewards, so it’s important to understand the laws in your country.
This article also did not address the MEV or fee income that stakers earn. Those transactions may still be considered taxable income.
Conclusion
In short, Jito’s legal memo suggests that neither minting/redeeming JitoSOL nor the accrual of staking rewards triggers tax—only a later sale does. Because this view isn’t yet codified by the IRS, maintain meticulous records and stay alert for new guidance that could shift the rules. Until then, careful tracking and a conservative reporting stance remain your best safeguards.
