Cryptocurrency staking guide: How to stake coins for rewards
Staking is one of the most popular ways to earn an income with cryptocurrency, but you need to tread carefully to avoid regulatory and tax troubles – here's what's involved.
Don't invest unless you're prepared to lose all the money you invest. This is a high-risk investment and you should not expect to be protected if something goes wrong. Take 2 mins to learn more.
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Due to the potential for losses, the Financial Conduct Authority (FCA) considers this investment to be high risk.
What are the key risks?
1. You could lose all the money you invest
The performance of most cryptoassets can be highly volatile, with their value dropping as quickly as it can rise. You should be prepared to lose all the money you invest in cryptoassets.
The cryptoasset market is largely unregulated. There is a risk of losing money or any cryptoassets you purchase due to risks such as cyber-attacks, financial crime and firm failure.
2. You should not expect to be protected if something goes wrong
The Financial Services Compensation Scheme (FSCS) doesn't protect this type of investment because it's not a 'specified investment' under the UK regulatory regime – in other words, this type of investment isn't recognised as the sort of investment that the FSCS can protect. Learn more by using the FSCS investment protection checker.
The Financial Ombudsman Service (FOS) will not be able to consider complaints related to this firm or Protection from the Financial Ombudsman Service (FOS) does not cover poor investment performance. If you have a complaint against an FCA regulated firm, FOS may be able to consider it. Learn more about FOS protection here.
3. You may not be able to sell your investment when you want to
There is no guarantee that investments in cryptoassets can be easily sold at any given time. The ability to sell a cryptoasset depends on various factors, including the supply and demand in the market at that time.
Operational failings such as technology outages, cyber-attacks and comingling of funds could cause unwanted delay and you may be unable to sell your cryptoassets at the time you want.
4. Cryptoasset investments can be complex
Investments in cryptoassets can be complex, making it difficult to understand the risks associated with the investment.
You should do your own research before investing. If something sounds too good to be true, it probably is.
5. Don't put all your eggs in one basket
Putting all your money into a single type of investment is risky. Spreading your money across different investments makes you less dependent on any one to do well.
A good rule of thumb is not to invest more than 10% of your money in high-risk investments.
If you are interested in learning more about how to protect yourself, visit the FCA's website here.
For further information about cryptoassets, visit the FCA's website here.
Staking involves temporarily locking up cryptocurrency to support the security and functionality of a blockchain network. In return, participants earn rewards, typically paid in additional cryptocurrency.
Similar to mining, staking is a way to earn rewards by participating in the operation of a blockchain, but it only requires capital in the form of coins or tokens rather than investing in computing hardware. As a result, staking has become one of the most prominent ways to earn an income from cryptocurrency.
What is staking?
Staking means depositing cryptocurrency into a blockchain network’s smart contract to earn rewards. These staked coins act as collateral, enabling functions like validating transactions or minting new tokens.
Exactly how astaking programme works, and the rewards paid for doing so, varies between each blockchain and decentralised app (dApp).
Staking originated as part of a consensus mechanism known as proof of stake (PoS). Proof of stake enables stakers to validate blocks by depositing their tokens as collateral as a means of ensuring honesty when validating transactions.
If the validator were to submit false transactions to the network, they would be punished by missing out on block rewards or even losing a portion of their staked tokens. Inversely, validators are rewarded with newly minted tokens for doing the right thing.
Typically, a validator’s chance of validating a block (and earning rewards) is proportional to the number of tokens the holder has compared to the total amount staked across the network.
DeFi staking
Staking is critical to decentralised finance (DeFi), where many dApps require token staking to function. Unlike blockchain-level PoS staking, DeFi staking offers more flexibility, with varied methods of staking and earning rewards.
Because staking occurs at the dApp level, there is more flexibility in how tokens are staked and how rewards may be earned compared to the more rigid process of PoS to secure the underlying blockchain.
DeFi staking example
For example, Uniswap users provide liquidity to the market by staking coins in return for liquidity provider tokens (LPT).
The staked coins then create a pool of collateral for users to trade in and out of, which eliminates the need for a counterparty on each trade.
In return for staking tokens, depositors receive a cut of the trading fees for the pool, and their LPT essentially works as an IOU coupon enabling the holder to redeem their deposit later on.
How does proof of stake (PoS) work?
Staking can be achieved in a number of ways, but typically it involves 4 key aspects:
It requires token holders to lock in a minimum number of tokens into the blockchain network as a stake similar to security deposits in the tangible world.
The stake is like buying a lottery ticket to earn the opportunity to create the next block in the blockchain network. The larger the stake, the higher chance of the node being chosen for the next block.
Once the node has created a block, the staker, who is also the validator, gets a reward in the blockchain’s native currency.
The stake incentivises the holder to contribute positively to the blockchain since a part of their stake is lost in the case that they double sign or try to attack the network.
Staking can be done directly from compatible cryptocurrency wallets. Some cryptocurrency exchanges such as Kraken and KuCoin even offer staking services to the users of their platform, which provides a convenient way to earn money while keeping coins ready to trade. Some blockchains also entitle stakers to voting rights on protocol changes to the blockchain, which means that these rights are instead awarded to the exchange if that’s where you’re storing your coins – something to think about.
To overcome the minimum threshold of tokens that participants need to own to become a part of the staking process, there is an innovation known as staking pools, which allow multiple holders to combine their computational resources in the blockchain to increase the chances of earning block rewards.
The funds of all the stakeholders in the staking pool are collected and locked in one blockchain or wallet address. The pool is managed by a pool operator and the stakeholders. Any voting powers are directly proportional to the number of tokens a stakeholder has locked within that particular pool.
When compared to individual staking, staking pools generally offer smaller rewards as the reward is split between all the stakeholders in the pool, and there are often staking pool fees involved as well. On the flipside, staking pools are a good option for consistent passive income for stakers who aren’t willing to get technically involved in maintaining and running a node for validation.
What coins can you stake?
Most of the native tokens of PoS blockchains can be used as a tool for staking. Here is a non-exhaustive list of cryptocurrency tokens that can be staked on their blockchain either through wallets or cryptocurrency exchanges:
Deposit tokens. Buy or deposit the crypto tokens on your chosen exchange or wallet.
Stake and monitor. Each crypto platform may offer different ways to initiate staking but it’s usually quite straightforward and signposted with just a few buttons, check you platform FAQs if you need in-depth instructions.
What rewards can you earn through staking?
Each blockchain or smart contract may use a different method of assigning and calculating staking rewards. The profitability of the rewards is highly dependent on the structure and conditions of the staking rewards of that particular network.
A few blockchains offer a fixed percentage of the funds as a staking reward, while many others base the rewards on various factors. Some of these factors are listed below:
The inflation rate prevailing in the economy
The number of coins staked in the network in total
The duration for which a particular staker has been involved in the staking process
The number of tokens staked by the holder
Is staking safe?
Even though staking is mostly safe, there are some risks attached to staking funds in a blockchain network or dapp:
Market risk. Staking doesn’t rid the token owner of the market risks involved in the cryptocurrency markets. If the price of the token falls in the market, the value of the token decreases as well and so do the attached rewards that come with it.
Lock-up period. There may be a minimum lock-up period for how long the tokens need to be deposited. The period varies based on the type of blockchain or dapp used for staking. During the lock-up period, the funds can’t be traded or withdrawn. Fortunately, not all staking systems have a lock-up period.
Proof of stake. PoS validators get a higher share of the rewards when compared to passive stakers. These higher rewards are meant to compensate the validators for the higher operating costs they bear to validate blocks and transactions on the blockchain actively. Since this requires high computational power, it is not something the average staker can be a part of.
Penalties. Stakers can lose portions of their stake for failing to meet the specific requirements of the protocol. Penalising stakers for such activities is known as slashing. Essentially, it is a process that the network and its governance use to disincentivise irregular and unethical behaviour in the blockchain network.
Exchanges. Stakers using cryptocurrency exchanges to stake their funds are vulnerable to hacks and exploits that are often seen in cryptocurrency markets.
Voting. By staking through an exchange, the staker essentially gives up his/her voting privileges in the network by handing it over to the exchange, thus leading to a certain degree of centralisation.
Impermanent loss. When staking coins to provide liquidity to a decentralised exchange that uses an Automated Market Maker (AMM) model, the staker must be aware of the potential for impermanent loss, which is a risk unique to dual-token AMM pools. Impermanent loss is due to changes in the market value of staked tokens that causes the ratio between the staked tokens to change, resulting in a potential loss for the depositor when they withdraw their portion of the pool.
UK government stance on staking
As of January 2025, the UK’s Financial Conduct Authority (FCA) is in the process of developing specific regulations for cryptoasset staking services (with a roadmap leading into 2026). Currently, there are no detailed FCA rules exclusively governing staking activities. However, recent developments provide some clarity:
Staking is not a collective investment scheme. The UK government recently made it clear that crypto staking doesn’t fall under the category of “Collective Investment Schemes” (CIS). This means staking services, even when pooling assets from multiple people, aren’t treated the same way as traditional investments like mutual funds.
FCA is working on clearer rules. The FCA is cooking up a proper framework for how staking and other crypto activities will be regulated. They’ve promised to publish a discussion paper in 2025 to gather input from industry experts and businesses. This means new rules could be on the way by as early as 2026.
Here’s what rules apply right now:
Anti-Money Laundering (AML) UK crypto firms have to follow strict rules to prevent fraud, including verifying customers’ identities and monitoring transactions.
Financial Promotions. If a company advertises staking services, those promotions must be clear, fair, and not misleading. This puts crypto staking promotiion under the same banner as standard financial promotions for the time being.
Tax on crypto staking
Crypto tax is complex, and calculating tax owed from staked coins is predictably tricky.
Taxation of staking rewards is complex. In the UK, rewards may be treated as either income (for ongoing staking returns) or capital gains (upon the sale of the earned tokens). Consult HMRC guidelines or a tax advisor for specific advice.
Cryptocurrency staking is a useful way to earn additional crypto income (almost like crypto dividends) from your existing portfolio. Only certain cryptos can be staked and it’s important to fully understand the risks and tax implications before you go staking mad.
*Cryptocurrencies aren't regulated in the UK and there's no protection from the Financial Ombudsman or the Financial Services Compensation Scheme. Your capital is at risk. Capital gains tax on profits may apply.
Cryptocurrencies are speculative and investing in them involves significant risks - they're highly volatile, vulnerable to hacking and sensitive to secondary activity. The value of investments can fall as well as rise and you may get back less than you invested. Past performance is no guarantee of future results. This content shouldn't be interpreted as a recommendation to invest. Before you invest, you should get advice and decide whether the potential return outweighs the risks. Finder, or the author, may have holdings in the cryptocurrencies discussed.
Anirudh Tiwari was a writer for Finder. He has written for crypto publications like CoinTelegraph and BeInCrypto. He has a Master’s degree in Finance. Apart from work, he is a music connoisseur and likes to play the drums. See full bio
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