Tezos Stakers Challenge IRS Tax Treatment of Staking Rewards

Tezos Stakers Challenge IRS Tax Treatment of Staking Rewards

In a significant legal move, Tezos network stakers Josh and Jessica Jarrett have filed a lawsuit against the Internal Revenue Service (IRS) regarding the tax implications of their staking rewards. Filed on October 10 in a federal court in Tennessee, the lawsuit contends that tokens generated through staking should be classified as property, and taxed only upon their sale, rather than at the point of creation.

Legal Argument: Tokens as New Property

The Jarretts argue that staking rewards are akin to producing new property, such as a farmer’s crops or an author’s manuscripts, which do not lead to income generation until they are sold. This legal approach suggests that tokens created during the staking process should not be treated as taxable income until a transaction occurs, a concept that the IRS has recognized in other tax contexts.

IRS's Stance on Block Rewards

Contrary to the Jarretts’ views, the IRS's 2023 guidelines classify block rewards, including those from staking, as taxable income the moment they come into existence. These guidelines stipulate that taxes must be paid based on the market value of the tokens at that point.

What the Jarretts Seek

The couple seeks three outcomes from this litigation:

• A judgment declaring that their prior federal income taxes were inaccurately assessed.
• A refund of $12,179 for taxes paid on 13,000 Tezos tokens earned in the 2020 tax year.
• A permanent injunction preventing the IRS from classifying tokens generated through staking as income.

Support from Coin Center

Coin Center, a Washington, DC-based think tank focused on cryptocurrency policy, is backing the Jarretts in their case. On October 9, Coin Center expressed support for the Jarretts’ claim, highlighting that current tax regulations may deter Americans from utilizing cryptocurrency and technologies that promote financial inclusivity. The organization has been advocating for significant legislative changes, such as the Virtual Currency Tax Fairness Act, which aims to establish a de minimis exemption for small personal cryptocurrency transactions.

History of Legal Disputes

This current lawsuit continues the Jarretts’ ongoing battle with the IRS, which began in 2021 when they filed a suit over 8,876 Tezos tokens earned from staking rewards in 2019. Despite not selling or exchanging these tokens at that time, they paid an estimated tax bill of $9,407. Subsequently, the couple pursued a legal refund claim of $3,293 and an increased tax credit due to a reduction in their income.

Conclusion: Seeking Legal Precedent

In 2022, the IRS successfully dismissed the Jarretts' case in a Tennessee District Court after offering them a partial refund of $4,000 for income taxes related to their staking rewards. The Jarretts declined this offer, aiming to establish a legal precedent for all proof-of-stake cryptocurrency chains. Their attempt to revive the original lawsuit was denied at the appeal level, but the couple remains determined to seek justice through this new case submitted in 2023.