The U.S. Internal Revenue Service (IRS) has doubled down on its position that crypto staking is taxable, saying that taxes are owed immediately upon receipt of staking rewards, Bloomberg reported.
This comes amid an ongoing legal battle between Joshua and Jessica Jarrett, a Tennessee couple who are staking on the Tezos network, and they believe their staking rewards will be sold. They argue that they should not be taxed.
In a Dec. 20 court filing, the IRS rejected the Jarretts' argument that staking creates “new assets” that are taxable only when sold. “Staking of virtual currencies should trigger tax liability immediately after execution,” the government said, rejecting the idea that staking tokens fall into the same category as agricultural products, books, and industrial products.
This lawsuit is currently being closely watched by the cryptocurrency industry and could have a significant impact on how staking rewards across all proof-of-stake blockchains are taxed in the United States.
The Jarrett family's legal battle with the IRS began in 2021, when they filed a lawsuit seeking a refund of $3,293 in taxes paid on 8,876 Tezos tokens earned through staking in 2019. At that time, tokens were not sold or exchanged. The couple said that because the tokens are “new assets” created through staking activities, they should not be taxed until the assets are sold, just like “a farmer's crops, an author's manuscript, or a manufacturer's products.” he claimed.
In 2022, the IRS attempted to dismiss the case by giving the Jarretts a refund of $4,000 in income taxes they paid on their Tezos compensation. However, the Jarretts refused the refund and chose to pursue further litigation to set a legal precedent for all staking participants across the Proof of Stake network.
“A year and a half into this process, the government did not want to defend the position that the tokens I created through staking were taxable income. […] I need a better answer. So I declined the government's offer for a refund,” Jarrett said.
According to According to IRS guidelines released in 2023, block rewards from staking or mining are treated as taxable income at the time they are generated and subject to tax liability based on their market value at the time of creation.
