The U.S. Internal Revenue Service (IRS) has firmly maintained its position that cryptocurrency staking rewards are subject to income tax immediately upon receipt, according to a recent Bloomberg report. This declaration is pivotal, especially amidst a high-profile legal dispute involving Tennessee couple Joshua and Jessica Jarrett, who have been staking on the Tezos network. The Jarretts argue that these rewards, akin to newly created property, should only be taxed upon sale, not upon acquisition.
The IRS, in a court filing dated December 20, explicitly rejected the notion that staking generates “new property” akin to crops, books, or manufactured goods, which traditionally are not taxed until sold. Instead, the government insists that “staking a cryptocurrency should induce a tax liability as soon as it is done,” challenging the Jarretts’ interpretation of tax law concerning digital assets.
This legal confrontation began in 2021 when the Jarretts filed for a tax refund, asserting that the $3,293 they paid in taxes on 8,876 Tezos tokens earned through staking in 2019 was premature, as they had not sold or exchanged these tokens. They equated their staking rewards to “a farmer’s crop, an author’s manuscript, or a manufacturer’s product,” which are only taxed upon sale or transfer.
In an attempt to settle the dispute without setting a precedent, the IRS offered the Jarretts a $4,000 refund in 2022, covering the income taxes paid on their Tezos rewards. However, the couple declined this offer, continuing their legal fight to establish a clear precedent for all participants in proof-of-stake blockchain networks. Joshua Jarrett articulated their stance by stating the need for a definitive legal answer rather than a simple refund.
The IRS’s stance on this matter was further clarified in 2023 guidelines, which dictate that any block rewards, whether from staking or mining, are to be treated as taxable income at the moment of creation, based on their market value at that time. This approach not only impacts how individuals like the Jarretts deal with their staking rewards but could set a tone for how all forms of crypto rewards are taxed across the U.S.
This case is now a focal point for the broader cryptocurrency industry, as its outcome could influence the tax treatment of staking rewards on numerous blockchains, potentially affecting investor behavior, the economic models of cryptocurrencies, and the appeal of participating in proof-of-stake networks. As staking becomes an increasingly popular method for earning passive income in the crypto space, clarity from this legal battle is eagerly awaited by stakeholders who are navigating the complex intersection of technology and tax law.
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