Tezos Stakers Challenge IRS Tax Treatment of Staking Rewards

The Ongoing Legal Battle: Jarretts vs. IRS on Staking Rewards Taxation

In a significant development in the realm of cryptocurrency taxation, Tezos network stakers Josh and Jessica Jarrett have initiated a new lawsuit against the Internal Revenue Service (IRS). This lawsuit was filed on October 10 in a federal court in Tennessee and challenges the IRS's approach to the taxation of staking rewards.

The Essence of the Complaint

The core of the Jarretts' complaint rests on the assertion that tokens generated through staking should be classified as "new property." They argue that similar to a farmer's crops or an author's manuscript, no income is realized until this property is sold. Therefore, the Jarretts contend that taxes on staking rewards should only apply upon the sale of the tokens, not at the point of their creation.

IRS Guidance on Staking Rewards

According to IRS guidelines released in 2023, block rewards from staking are categorized as income at their creation moment. This means that taxes are due based on the fair market value of the tokens at that moment. The Jarretts are contesting this practice, seeking a judicial ruling that would deem their previous federal income taxes as incorrectly assessed.

Seeking Refund and Legal Clarity

Specifically, the Jarretts are asking for a refund of $12,179 for taxes paid on 13,000 Tezos tokens earned in the 2020 tax year. Furthermore, they are pursuing a permanent injunction to prevent the IRS from treating tokens created through staking as taxable income. This legal action is backed by Coin Center, a Washington, DC-based think tank advocating for cryptocurrency regulation reform.

Previous Legal Challenges

This current lawsuit is not the first challenge the Jarretts have posed against the IRS. Their legal disputes started in 2021 when they contested the taxation of 8,876 Tezos tokens earned in 2019 as staking rewards. Despite not selling or exchanging these tokens, they paid an estimated tax bill of $9,407. Subsequently, they sought a refund of $3,293 due to changes in their taxable income.

IRS Response and Case Dismissal

In 2022, the IRS succeeded in having the initial case dismissed in a Tennessee District Court after offering the Jarretts a $4,000 tax refund for taxes already paid on their staking rewards. However, the Jarretts rejected the refund, hoping to establish a legal precedent for all proof-of-stake networks. The IRS argued that, having issued the refund, the case was rendered moot, which the courts ultimately supported by dismissing the appeal from the Jarretts.

The Implications of This Case

This ongoing legal battle is more than a dispute between the Jarretts and the IRS; it is emblematic of the broader conversation regarding cryptocurrency regulation and tax policies. The Jarretts, with support from Coin Center, are pushing for legislative reforms, such as the proposed Virtual Currency Tax Fairness Act, which aims to offer a de minimis exemption for small personal cryptocurrency transactions. Such changes could potentially reshape how staking rewards and other cryptocurrency transactions are taxed in the future.

Conclusion

The outcome of the Jarretts' latest legal venture could have widespread implications for cryptocurrency taxation in the United States. As the cryptocurrency landscape continues to evolve, so too does the need for legal frameworks that accommodate its unique characteristics. The Jarretts' fight highlights the ongoing challenges stakeholders face in navigating the complexities of tax law and compliance in the rapidly growing world of digital currencies.