Former Ripple CTO David Schwartz has proposed a hypothetical design for native XRP staking that could shield investors from stringent requirements imposed by the U.S. Internal Revenue Service (IRS).
During a discussion with crypto tax expert Clinton Donnelly, Schwartz explained how the technical architecture of reward distribution determines the legal status of staking income.
The central dilemma in crypto staking taxation is whether it is fair to tax staking rewards before they are sold, or whether doing so constitutes IRS overreach.
For potential XRP staking, Schwartz stated that everything depends on the specific protocol settings, and he outlined two clear categories:
When the IRS is right: If staking rewards already existed before and are simply transferred to a holder, then early taxation is reasonable and justified.
When the IRS overreaches: If rewards are minted — created from scratch — by the same process that distributes them to the holder, then demanding taxes before a sale constitutes direct overreach by the agency.
To illustrate this legal nuance, Schwartz drew on a straightforward analogy from the traditional tax code. If new tokens are created by the staking process itself, that amounts to the production of a good, not income, until the moment of sale.
"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," said Schwartz, Ripple CTO Emeritus.
By contrast, if tokens are transferred by a third party as compensation for the service of holding assets, they are recognized as taxable income at the moment of transfer.
Reality of XRP Staking in 2026
This statement carries particular weight for the industry because Schwartz is discussing native staking on the XRP Ledger for only the second time. The previous occasion was two years ago, and his position at that time was notably critical.
Assessing passive income through liquidity pools, or automated market makers (AMMs), on the XRP Ledger, Schwartz warned that investors must exchange their XRP for pool tokens in order to participate. This mechanism offers no guarantee that holders will receive their original amount of assets back, while the real value of any income can erode if the XRP price declines in the interim.
The shift from criticizing AMM market risks to designing a "tax-safe" structure suggests that Schwartz is now seeking technical compromises to support the broader development of the ecosystem.
Despite renewed excitement in the community, Schwartz's concept remains purely theoretical as of today. XRP still cannot technically be staked natively within the XRP Ledger, because the network operates on a federated consensus protocol rather than Proof-of-Stake (PoS).
To earn income on their holdings, XRP holders currently must turn to third-party centralized exchanges, lending platforms, or DeFi protocols such as Flare Network. This sector presently offers moderate yields of around 1.5% to 5% APR, but that comes with significantly elevated risks — ranging from platform vulnerabilities and exploits to the danger of impermanent losses.
Why it matters
The legal distinction Schwartz draws — between minted rewards and transferred rewards — maps directly onto an unresolved IRS question that affects all proof-of-stake and staking-adjacent protocols, not just XRP. How a protocol is technically designed could determine whether holders owe tax at receipt or only at sale.
Because the XRP Ledger uses federated consensus rather than Proof-of-Stake, any native staking mechanism would require a deliberate architectural choice about how rewards are generated — making the tax treatment a design decision, not just a legal one.
Current third-party yield options for XRP holders carry risks — including platform vulnerabilities and impermanent loss — that a native, protocol-level mechanism could structurally avoid, though no such mechanism exists yet.
