What is staking: how it works, what it pays, what you risk

Short answer: staking is not a deposit account, it is putting your coins up as collateral so that a validator does its job. In return you receive rewards denominated in that coin, not in euros. The big risk is not slashing or the lock-up: it is the coin falling. In Spain they are taxed as investment income — rendimientos del capital mobiliario, the same box as the interest on a bank deposit — on the day you collect them.

It is sold as a fixed-term deposit that pays better. You put your coins in, they generate a percentage for you, you take them out whenever you like. That description is comfortable, it is the one almost every platform uses, and it leaves out the three things that matter when something goes wrong.

It is worth understanding what you are really doing, because it is almost nothing like a deposit.

What is actually happening when you stake

Many networks need somebody to validate the transactions and order the blocks. On Bitcoin that work is done by miners burning electricity. On proof-of-stake networks — Ethereum, Solana, Cardano and most of the newer ones — it is done by whoever puts coins at stake as collateral.

That is the word: collateral. Your coins are committed to backing the validator's good behaviour. If it behaves, the network pays it for the service and it passes on your share. If it cheats or stops working, the network takes away a portion of what was committed — and that portion comes out of yours as well.

You are not lending money to somebody who will hand it back with interest. You are putting up a security deposit for a job that somebody else does on your behalf.

Where that percentage comes from

From two places, and it is worth telling them apart because they are not worth the same.

• Transaction fees. Money paid by real users for using the network. This is genuine income: somebody has paid for a service.
• New issuance. The network creates coins and gives them to you. Nobody has paid here: they have simply appeared, and with them every existing coin represents a slightly smaller share of the total.

The consequence is uncomfortable and it is the key to the whole business: if most of the yield comes from issuance, a good part of what you earn is what the people who do not stake are being diluted by. It is not money coming in from outside. When almost everybody takes part, the percentage stops being an advantage and turns into what you have to do in order not to fall behind.

And there is a second detail that the yield tables never mention: that percentage is denominated in the coin itself, not in euros. A 6% a year on a coin that falls 40% is a 36% loss, not a gain. Comparing that number with the one on a bank deposit is comparing two things that are not measured in the same unit.

The four ways of doing it

They run from most control and most work to less of both.

• Your own validator. You set up the machine, keep it switched on and answer for it. Maximum yield and maximum responsibility; on Ethereum it also takes a high minimum number of coins.
• Delegation. You still hold your coins and you grant a validator the right to use them as collateral. It keeps a commission. It is the reasonable middle ground for most people.
• On an exchange. One button. It does everything and keeps a share, sometimes a fairly large one. And it adds the risk we discuss below: either you or the platform is the custodian of your coins, and here it is the platform.
• Liquid staking. You deposit and are given in return a token that represents your position and that you can actually move. It solves the lock-up and in exchange adds a layer of smart contract between you and your coins, with the risk that brings.

The risks that are not in the brochure

The money is not available when you need it

Withdrawing from staking is not instant. Many networks have an unbonding period during which your coins neither generate anything nor can be moved: on Cosmos it is 21 days, and other networks use similar terms or exit queues that stretch out when a lot of people leave at once.

It is exactly when you want to get out — a sharp fall, a scare in the project — that most people want to get out, and the longer the queue takes. A bank deposit has a penalty for cancelling; this one costs you time, which in a market that moves 20% in three days is worse.

Slashing: they can take away part of what you put in

If the validator signs two contradictory versions of a block or goes offline for too long, the network penalises it by taking coins away from it. If you delegated to it, the penalty reaches you. It is not frequent and it is not hypothetical: that is why the choice of validator matters more than a list sorted by yield would suggest.

Who really holds your coins

If you stake from a platform, your coins sit on its balance sheet. If the platform has a problem, your position has the same problem — and unlike a bank, there is no deposit guarantee scheme here. It is the same reasoning that applies to leaving your balance on an exchange, and we develop it in hot wallets and cold wallets.

And the big one, which is the boring one

The price. None of the three things above is going to cost you as much money as the coin falling. Staking yields are single digits a year; these assets move that in an afternoon. Choosing a bad coin because it pays a good percentage is like choosing a flat for the colour of the kitchen.

How it is taxed in Spain

Staking rewards are rendimientos del capital mobiliario — investment income, in the same category as the interest on a deposit — and are taxed in the savings base of Spanish income tax at their value in euros on the day you receive them. They are not capital gains, which is the most common mistake people make when declaring them.

There are two practical consequences that cost money if they are overlooked:

• You are taxed even if you have not sold anything. The day the reward lands in your account there is already income, valued in euros at that day's price. If the coin falls afterwards, you will still owe on the value it had when you collected it.
• That value becomes its acquisition price. When you sell those coins, the gain is calculated from there, not from zero. Noting it down on the day you receive them saves you the problem; reconstructing it two years later, with rewards arriving every few days, is unworkable.

The general rules — savings tax bands, offsetting losses, swaps, Form 721, the Spanish declaration of assets held abroad — are in the guide to crypto tax in Spain, which is the page where we keep that detail up to date. And you can work out your own situation from your real transaction history.

When it makes sense and when it does not

It makes sense if you were going to hold that coin for years whatever happened, you understand that the percentage is denominated in the coin and not in euros, and you can afford not to touch that balance for the length of the unbonding period.

It does not make sense if the percentage is what convinced you to buy the coin. That is the order back to front, and it is the same mistake as choosing a coin before deciding on an amount: when the reason to get in is the advertised yield, the first serious fall finds you with no reason at all to stay.

Be wary, too, of high double-digit percentages. On a large, established network the yield is modest by design. A number far above that does not come from validating blocks: it comes from aggressive issuance, from an extra layer of risk that nobody is naming, or from somebody paying the rewards with the next person's money. All three end the same way.

This content is for information only and does not constitute financial or tax advice. Investing in crypto-assets can lead to the total loss of your capital.