The debate around XRP staking has returned. This time, it comes with a warning about taxes. Former Ripple CTO David Schwartz recently outlined a theoretical structure for XRP staking that could shield investors from what many in crypto see as IRS overreach.
His comments came during a discussion with crypto tax expert Clinton Donnelly. The focus was simple: when should staking rewards actually be taxed? Schwartz argued that the answer depends entirely on how the rewards are created.
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XRP Staking Could Change the Tax Debate
According to Schwartz, there are two clear paths. The first path favors the IRS. If staking rewards already exist and are simply transferred to users as payment, then taxation at the time of receipt makes sense. In this case, the rewards are treated like ordinary income.
The second path is different. Schwartz said that if rewards are minted during the staking process itself, then taxing them before sale becomes unreasonable. He compared the process to knitting a sweater.
“If the staking rewards are created by the staking process, then it’s just like if you knitted a sweater for sale. There’s no tax due until you sell the sweater.”
The analogy matters because it shifts the argument away from finance and toward production. If tokens are “created” rather than distributed, then investors may only owe taxes once they sell the assets. For many crypto holders, this distinction could become critical if regulators increase pressure on staking services.
XRP Staking Still Faces Technical Limits
Despite the excitement, XRP staking does not yet exist natively on the XRP Ledger. Unlike Ethereum and other Proof-of-Stake networks, XRPL runs on a federated consensus model. That means traditional staking is not built into the system.
Schwartz himself was skeptical of passive income models tied to XRPL two years ago. At the time, he warned that liquidity pools and AMMs forced users to exchange XRP for pool tokens. This created exposure to price swings and impermanent loss.
Today, XRP holders seeking yield must still rely on centralized exchanges, lending services, or DeFi platforms like Flare Network. These options currently offer yields between 1.5% and 5% APR, but they also introduce security risks and platform vulnerabilities.
For now, Schwartz’s proposal remains theoretical. But the discussion shows that XRP staking is no longer being dismissed outright. Instead, Ripple insiders appear to be exploring ways to make it technically workable and legally defensible.
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