Briefing
The Internal Revenue Service (IRS) issued Revenue Procedure 2025-31, establishing a safe harbor that permits publicly traded, single-asset digital trusts to engage in staking on proof-of-stake networks without jeopardizing their tax classification as investment trusts or grantor trusts. This action directly addresses a long-standing legal ambiguity → the “power to vary the investment” rule → which previously threatened the pass-through tax treatment of popular Exchange-Traded Products (ETPs) that sought to generate yield through staking. The immediate compliance requirement is a nine-month window, beginning November 10, 2025, during which existing trusts may amend their governing instruments to adopt the 14 specified safe harbor conditions.
Context
Before this guidance, the primary compliance challenge for digital asset ETPs organized as trusts was the risk of losing their favorable grantor trust status. Under Treasury Regulation § 301.7701-4(c), a trust is disqualified from this status if its agreement grants the trustee the “power to vary the investment” of the holders. Staking activity, which involves actively generating a return on the underlying asset, was widely interpreted by tax professionals as potentially violating this rule, forcing ETPs to forego staking yield or face reclassification as a more complex, less tax-efficient partnership or corporation. This uncertainty created a competitive disadvantage for US-based products compared to those in jurisdictions with clearer tax treatment for staking.
Analysis
This Revenue Procedure fundamentally alters the product structuring and operational requirements for digital asset ETP issuers. Issuers must now integrate the 14 new safe harbor requirements into their compliance frameworks, which include strict conditions on custody, liquidity, and operational controls to maintain the investment trust classification. The chain of effect is direct → compliance with these specific parameters enables a trust to legally generate staking yield, which immediately impacts the product’s total return and competitive position in the market.
Failure to comply with the new rules during the amendment window will expose the ETP to significant tax risk, including the loss of pass-through treatment and the imposition of entity-level U.S. federal income taxes. This guidance effectively provides a blueprint for operationalizing yield generation within a regulated financial product wrapper.
Parameters
- Safe Harbor Conditions → 14 requirements must be met by the trust, covering custody, liquidity, and operational controls, to qualify for the safe harbor.
- Amendment Window Start → November 10, 2025, marks the beginning of the nine-month period for existing trusts to amend governing instruments.
- Trust Scope → Narrowly tailored to cover only publicly traded, single-asset digital trusts.
Outlook
The immediate strategic outlook centers on the rapid amendment of existing ETP governing documents to capture the newly legalized staking yield. This action is likely to increase competition among single-asset ETPs, driving down expense ratios as issuers monetize staking rewards. Furthermore, the IRS’s use of a narrowly tailored safe harbor sets a precedent for how US regulators may address the tax treatment of on-chain activities, preferring specific, functional guidance over broad statutory reinterpretation. This could encourage other agencies to issue similar, targeted clarity for decentralized finance and other yield-generating digital asset activities, thereby fostering greater institutional participation and product innovation.
