A liquid staking token, or LST, is a token you receive when you stake through a liquid staking protocol. It records your staked position and the rewards accruing on it, and unlike directly staked assets it can be traded, lent or supplied to a pool while the underlying stake stays locked. stETH and rETH are the best known examples.
Staking ETH directly requires 32 ETH and a validator, and the stake cannot be moved while it is active. A liquid staking protocol pools deposits from many users, runs validators on their behalf, and issues a token recording each depositor's share.
Rewards reach you in one of two ways, and the difference matters. Rebasing tokens such as stETH increase the balance in your wallet as rewards accrue, so you hold more tokens over time while each stays close to parity with ETH. Reward-bearing tokens such as rETH keep the balance fixed and rise in value against ETH instead.
Because the token is transferable, the same staked ETH gets used again. LSTs are supplied to liquidity pools, posted as collateral in lending protocols and staked again in other products. Each of those layers is its own transaction with its own consequences.
Two separate questions sit inside that one, and they have different answers.
On the rewards, the position is reasonably settled. Revenue Ruling 2023-14 holds that staking rewards are included in gross income at fair market value when the taxpayer gains dominion and control over them. Rewards reaching you through an LST are income as they accrue, valued at that point, and that value becomes your cost basis in them.
On the exchange into the LST, there is no IRS guidance. Handing over ETH and receiving a different token with a different contract address looks like an exchange under section 1001. The counter-argument is that the LST is a receipt for a position you still own and can redeem. Neither reading has been confirmed.
Rebasing and reward-bearing tokens also raise different timing questions. A rebasing balance produces income continuously. A reward-bearing token produces no wallet activity at all until you sell, which does not remove the income, only the record of it.
Rebasing is where most reports go wrong. A wallet holding stETH receives small balance increases every day, and tax software either ignores them, which leaves the income unreported and the extra tokens with no basis, or imports every one as a separate income line and produces thousands of entries in a single year. Neither gives a usable figure without manual work behind it.
Read our 2026 Guide to DeFi Taxes
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