IRS Rules Crypto Staking Rewards Taxable In Ongoing Lawsuit
According to the latest report from Bloomberg Reportthe U.S. Internal Revenue Service (IRS) officially stated that cryptocurrency staking is taxable, stating that tax liability will arise once staking rewards are received.
The ruling comes amid an ongoing lawsuit against Joshua and Jessica Jarrett, a Tennessee couple who staked on the Tezos network. A lawsuit was filed against the government over tax clarification of cryptocurrency staking and the IRS’s view.
Notably, in a Dec. 20 court filing, the IRS rejected the Jarretts’ claim that the pledge creates “new property” that should only be taxed upon sale. The government noted that “once the staking of cryptocurrencies is completed, tax liability should arise.” It rejected the idea that pledged tokens fall into the same category as crops, books, or manufactured goods.
Significant impact of taxing PoS rewards
The legal action, filed in October, could have serious consequences. The case is being closely watched by the cryptocurrency industry as it could have significant implications for how the United States taxes staking rewards for all proof-of-stake blockchains.
The Jarretts’ legal battle with the IRS began in 2021, when they filed a lawsuit seeking the refund of $3,293 in taxes they paid on 8,876 Tezos tokens earned through staking in 2019 before the tokens were sold or exchanged. They argue that these tokens are “new property” created through their staking efforts that are only taxable when sold, similar to a farmer’s crops or an author’s manuscript.
In 2022, the IRS attempted to dismiss the case and provide the Jarretts with a $4,000 Tezos bonus income tax refund. However, the Jarretts refused to refund the money and chose to continue the lawsuit, setting a legal precedent for all staking participants across proof-of-stake networks.
“It’s been a year and a half since this process, and the government doesn’t want to defend the position that the tokens I created through staking were taxable income. I needed a better answer. So I declined the government’s offer to refund me,” Jarler Special said.
According to guidance issued by the IRS in 2023, block rewards from staking or mining are considered taxable income upon creation, with tax liability determined by their market value at the time of creation.
