Former Ripple CTO David Schwartz proposed a hypothetical design for native XRP staking that could protect investors from strict requirements from the U.S. Internal Revenue Service, or IRS. During a discussion with crypto tax expert Clinton Donnelly, Schwartz explained exactly how the technical architecture of reward distribution determines their legal status.

The main bottleneck and dilemma in crypto staking is taxation, namely whether it is fair to tax staking rewards before they are sold, or whether this is another case of IRS overreach. For potential XRP staking, Schwartz directly states that everything depends on the specific protocol settings and falls into two clear categories:

• When the IRS is right: if staking rewards already existed before and are simply transferred to you, then early taxation is reasonable and justified.
• When the IRS overreaches: if rewards are minted, or created from scratch, by the same process that distributes them to you, then demanding taxes before sale is direct overreach by the agency.

To explain this legal nuance, Schwartz used a basic analogy from the traditional tax code. If new tokens are created by the staking process itself, this is the production of a good, until you sell it.

"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."

— David Schwartz, Ripple CTO Emeritus

But 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

For the industry, this statement matters because Schwartz is discussing native staking in XRP Ledger for only the second time in history. The previous time he spoke on this topic was two years ago, and back then his position was critical.

Assessing passive income through liquidity pools, or AMMs, in XRPL, Schwartz warned that investors have to exchange their XRP for pool tokens in order to participate. This mechanism deprives holders of any guarantee that they will receive the original amount of assets back, while the real value of the income falls if the XRP price declines by that time.

The transition from criticism of AMM market risks to designing a "tax-safe" structure indicates that Schwartz is looking for technical compromises for the 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 inside XRPL, because the network uses a federated consensus protocol, not Proof-of-Stake, or PoS.

To earn income on their assets, XRP holders still have to turn to third-party centralized exchanges, lending platforms or DeFi protocols, such as Flare Network. This sector currently offers moderate yields of around 1.5% to 5% APR, but it comes with a major increase in risks for the holdings, from vulnerabilities and exploits on the platforms themselves to the danger of impermanent losses.

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