- The IRS maintains that staking rewards are taxable as income upon receipt, not upon sale.
- The Jarretts’ legal challenge seeks to classify staking rewards as property, delaying taxation until sale.
- The outcome of this case could reshape US tax policy on cryptocurrency staking rewards.
The United States Internal Revenue Service (IRS) has reinforced its stance that cryptocurrency staking rewards should be taxed as income upon receipt, dismissing arguments that taxation should be deferred until the rewards are sold, according to the reports.
In response to a legal challenge by Joshua and Jessica Jarrett, the IRS cited its 2023 guidance, emphasizing that taxpayers must report staking rewards at their fair market value once they have the ability to sell or exchange them.
Staking refers to the process of locking digital assets within the blockchain network for transaction verification and security purposes. In return, some rewards are given to the participants for staking, which generally comes in crypto tokens. According to the IRS, such rewards are considered income that is taxed upon receipt and not at a later point when such rewards are exchanged or sold.
The Jarretts initiated this lawsuit in 2021 by filing their complaint against the IRS regarding taxes on 8,876 Tezos issued as rewards in 2019. They have argued that such staking rewards are newly created property that is no different than crops or manuscripts and, hence, can only be taxed at sale.
Initially, the IRS offered the couple a refund of $4,000 for overpayment of income taxes, which they declined in hopes of securing a wider-reaching legal precedent.
Jarretts Persist in Legal Battle Against IRS Policy
After the IRS offered to refund, the first suit was dismissed as moot; the Jarretts reinstituted the litigation in October 2024 with the filing of a new suit challenging the IRS’s policy of taxing the sale. They now want $12,179 back for the taxes they paid on 13,000 XTZ tokens that they earned in 2020, as well as a permanent injunction against the IRS approach to taxing staking rewards.
Their legal argument remains the same: staking rewards are new property created and, as such, should not be included as taxable income until they are sold. They further claim that the IRS has double standards in regard to this, as it taxes staking rewards as income but does not tax other classes of newly created assets, such as crops or authored works, until they are sold.
Conversely, the IRS maintains its interpretation on the basis that one’s ability to dispose of staking rewards makes them taxable under existing regulations.
Implications for Cryptocurrency Tax Policy
This makes the outcome of this litigation a very important one, particularly for cryptocurrency holders and broader industry participants in the United States. The ruling for the Jarretts could set such a precedent that it might eventually alter how staking rewards are viewed for tax purposes, making the ripple effects well transcend the DeFi ecosystem.
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