diff --git a/pkg/ride/diff_state.go b/pkg/ride/diff_state.go
index 612befe38c..f84a05d77e 100644
--- a/pkg/ride/diff_state.go
+++ b/pkg/ride/diff_state.go
@@ -32,6 +32,7 @@ type diffBalance struct {
 	leaseIn         int64
 	leaseOut        int64
 	stateGenerating int64
+	challenged      bool
 }
 
 func (db *diffBalance) addBalance(amount int64) error {
@@ -88,6 +89,9 @@ func (db *diffBalance) checkedSpendableBalance() (uint64, error) {
 }
 
 func (db *diffBalance) effectiveBalance() (int64, error) {
+	if db.challenged {
+		return 0, nil // challenged account has zero effective balance at the current block
+	}
 	v1, err := common.AddInt(db.balance, db.leaseIn)
 	if err != nil {
 		return 0, err
@@ -240,6 +244,7 @@ func (ds *diffState) loadWavesBalance(id proto.AddressID) (diffBalance, error) {
 		leaseIn:         profile.LeaseIn,
 		leaseOut:        profile.LeaseOut,
 		stateGenerating: int64(profile.Generating),
+		challenged:      profile.Challenged,
 	}
 	// Store new diff locally
 	ds.wavesBalances[id] = diff
diff --git a/pkg/state/balances.go b/pkg/state/balances.go
index af60dd2986..2fed4a141c 100644
--- a/pkg/state/balances.go
+++ b/pkg/state/balances.go
@@ -35,7 +35,9 @@ type balanceProfile struct {
 	leaseOut int64
 }
 
-func (bp *balanceProfile) effectiveBalance() (uint64, error) {
+// effectiveBalanceUnchecked returns effective balance without checking for account challenging.
+// The function MUST be used ONLY in the context where account challenging IS CHECKED.
+func (bp *balanceProfile) effectiveBalanceUnchecked() (uint64, error) {
 	val, err := common.AddInt(int64(bp.balance), bp.leaseIn)
 	if err != nil {
 		return 0, err
@@ -43,6 +45,23 @@ func (bp *balanceProfile) effectiveBalance() (uint64, error) {
 	return uint64(val - bp.leaseOut), nil
 }
 
+type challengedChecker func(proto.AddressID, proto.Height) (bool, error)
+
+func (bp *balanceProfile) effectiveBalance(
+	challengedCheck challengedChecker, // Function to check if the account is challenged.
+	addrID proto.AddressID, // Address ID of the current balanceProfile.
+	currentHeight proto.Height, // Current height.
+) (uint64, error) {
+	challenged, err := challengedCheck(addrID, currentHeight)
+	if err != nil {
+		return 0, err
+	}
+	if challenged {
+		return 0, nil // Challenged account has 0 effective balance.
+	}
+	return bp.effectiveBalanceUnchecked()
+}
+
 func (bp *balanceProfile) spendableBalance() uint64 {
 	return uint64(int64(bp.balance) - bp.leaseOut)
 }
@@ -577,7 +596,7 @@ func minEffectiveBalanceInRangeCommon(records [][]byte) (uint64, error) {
 		if err := record.unmarshalBinary(recordBytes); err != nil {
 			return 0, err
 		}
-		effectiveBal, err := record.effectiveBalance()
+		effectiveBal, err := record.effectiveBalanceUnchecked()
 		if err != nil {
 			return 0, err
 		}
@@ -701,6 +720,8 @@ func (s *balances) storeChallengeHeightForAddr(
 
 type entryDataGetter func(key []byte) ([]byte, error)
 
+// isChallengedAddressInRangeCommon checks if the address was challenged in the given range of heights.
+// startHeight and endHeight are inclusive.
 func isChallengedAddressInRangeCommon(
 	getEntryData entryDataGetter,
 	addr proto.AddressID,
@@ -759,6 +780,14 @@ func (s *balances) isChallengedAddressInRange(addr proto.AddressID, startHeight,
 	return isChallengedAddressInRangeCommon(s.hs.topEntryData, addr, startHeight, endHeight)
 }
 
+func (s *balances) isChallengedAddress(addr proto.AddressID, height proto.Height) (bool, error) {
+	var (
+		startHeight = height
+		endHeight   = startHeight // we're checking only one height, so the heights are the same
+	)
+	return s.isChallengedAddressInRange(addr, startHeight, endHeight)
+}
+
 func (s *balances) newestIsChallengedAddressInRange(
 	addr proto.AddressID,
 	startHeight, endHeight proto.Height,
@@ -766,6 +795,14 @@ func (s *balances) newestIsChallengedAddressInRange(
 	return isChallengedAddressInRangeCommon(s.hs.newestTopEntryData, addr, startHeight, endHeight)
 }
 
+func (s *balances) newestIsChallengedAddress(addr proto.AddressID, height proto.Height) (bool, error) {
+	var (
+		startHeight = height
+		endHeight   = startHeight // we're checking only one height, so the heights are the same
+	)
+	return s.newestIsChallengedAddressInRange(addr, startHeight, endHeight)
+}
+
 // minEffectiveBalanceInRange returns minimal effective balance in range [startHeight, endHeight].
 //
 // IMPORTANT NOTE: this method returns saved on disk data, for the newest data use newestMinEffectiveBalanceInRange.
diff --git a/pkg/state/state.go b/pkg/state/state.go
index 6605cc33df..f9b2ece98c 100644
--- a/pkg/state/state.go
+++ b/pkg/state/state.go
@@ -1001,7 +1001,7 @@ func (s *stateManager) FullWavesBalance(account proto.Recipient) (*proto.FullWav
 	if err != nil {
 		return nil, errs.Extend(err, "failed to get waves balance")
 	}
-	effective, err := profile.effectiveBalance()
+	effective, err := profile.effectiveBalanceUnchecked()
 	if err != nil {
 		return nil, errs.Extend(err, "failed to get effective balance")
 	}
@@ -1013,6 +1013,13 @@ func (s *stateManager) FullWavesBalance(account proto.Recipient) (*proto.FullWav
 	if err != nil {
 		return nil, errs.Extend(err, "failed to get generating balance")
 	}
+	if generating == 0 { // we need to check for challenged addresses only if generating balance is 0
+		chEffective, effErr := profile.effectiveBalance(s.stor.balances.isChallengedAddress, addr.ID(), height)
+		if effErr != nil {
+			return nil, errs.Extend(effErr, "failed to get checked effective balance")
+		}
+		effective = chEffective
+	}
 	return &proto.FullWavesBalance{
 		Regular:    profile.balance,
 		Generating: generating,
@@ -1032,7 +1039,7 @@ func (s *stateManager) NewestFullWavesBalance(account proto.Recipient) (*proto.F
 	if err != nil {
 		return nil, wrapErr(RetrievalError, err)
 	}
-	effective, err := profile.effectiveBalance()
+	effective, err := profile.effectiveBalanceUnchecked()
 	if err != nil {
 		return nil, wrapErr(Other, err)
 	}
@@ -1044,6 +1051,13 @@ func (s *stateManager) NewestFullWavesBalance(account proto.Recipient) (*proto.F
 	if gb, gbErr := s.NewestGeneratingBalance(account, height); gbErr == nil {
 		generating = gb
 	}
+	if generating == 0 { // we need to check for challenged addresses only if generating balance is 0
+		chEffective, effErr := profile.effectiveBalance(s.stor.balances.newestIsChallengedAddress, addr.ID(), height)
+		if effErr != nil {
+			return nil, wrapErr(RetrievalError, effErr)
+		}
+		effective = chEffective
+	}
 	return &proto.FullWavesBalance{
 		Regular:    profile.balance,
 		Generating: generating,
@@ -1067,11 +1081,20 @@ func (s *stateManager) WavesBalanceProfile(id proto.AddressID) (*types.WavesBala
 	if gb, gbErr := s.stor.balances.newestGeneratingBalance(id, height); gbErr == nil {
 		generating = gb
 	}
+	var challenged bool
+	if generating == 0 { // fast path: we need to check for challenged addresses only if generating balance is 0
+		ch, chErr := s.stor.balances.newestIsChallengedAddress(id, height)
+		if chErr != nil {
+			return nil, wrapErr(RetrievalError, chErr)
+		}
+		challenged = ch
+	}
 	return &types.WavesBalanceProfile{
 		Balance:    profile.balance,
 		LeaseIn:    profile.leaseIn,
 		LeaseOut:   profile.leaseOut,
 		Generating: generating,
+		Challenged: challenged,
 	}, nil
 }
 
diff --git a/pkg/types/types.go b/pkg/types/types.go
index 636002b4cf..fbf871605b 100644
--- a/pkg/types/types.go
+++ b/pkg/types/types.go
@@ -43,6 +43,7 @@ type WavesBalanceProfile struct {
 	LeaseIn    int64
 	LeaseOut   int64
 	Generating uint64
+	Challenged bool // if Challenged true, the account considered as challenged at the current height.
 }
 
 // SmartState is a part of state used by smart contracts.