The United States Internal Revenue Service (IRS) has reaffirmed its stance that rewards earned through staking activities do not constitute new property. This decision is a significant blow to those who have been fighting against the agency’s position, which deems these rewards as taxable income upon receipt.
Background on Staking
Staking is a process where individuals lock up their cryptocurrency in a smart contract to contribute to the validation of transactions and the security of the network. As a reward for participating in this process, users earn more cryptocurrency, which can be sold or exchanged for fiat currency.
The Jarrett Tax Dispute
At the center of the controversy is Joshua and Jessica Jarrett’s ongoing legal battle with the IRS over their staking rewards from Tezos (XTZ) tokens. The couple has been fighting against the agency’s position since 2021, arguing that these rewards should be considered property and taxed only upon sale.
The First Lawsuit
In their first lawsuit filed in 2021, the Jarretts argued that the 8,876 XTZ tokens earned as staking rewards in 2019 were akin to a farmer’s crop or an author’s manuscript. They believed that these tokens should be treated as property and taxed only when sold. However, the IRS responded by offering a $4,000 tax refund, which the Jarretts declined.
The Second Lawsuit
In October 2024, the Jarretts filed a second lawsuit seeking a declaration that their staking rewards should be treated as property and taxed only upon sale. They requested a refund of $12,179 for taxes paid on 13,000 XTZ tokens earned in the 2020 tax year.
The IRS’s Position
The IRS has maintained its position that rewards from staking activities are taxable income upon receipt. In a statement, the agency emphasized that Revenue Ruling 2023-14 requires taxpayers to report staking rewards as income at their fair market value when they have the ability to sell, exchange, or dispose of them.
Consequences of the Decision
The IRS’s stance has significant implications for the crypto industry. If the agency’s position is upheld, it could set a precedent for how digital asset staking should be treated in the US. This decision may also impact other countries with similar tax laws and regulations.
What Does this Mean for Crypto Holders?
For individuals who participate in staking activities, this decision means that they will need to report their rewards as taxable income upon receipt. This could result in a significant increase in tax liabilities for those who earn substantial rewards through staking.
Tax Implications of Staking Rewards
According to the IRS’s 2023 guidance, block rewards, including staking, are classified as ‘income’ from the moment they are created. Tax is based on the estimated market value of the tokens at the time. This means that stakers will need to report their rewards as income and pay taxes accordingly.
The Impact on Proof-of-Stake Networks
The Jarrett tax dispute has far-reaching implications for proof-of-stake networks, which rely heavily on staking activities. If the IRS’s position is upheld, it could set a precedent that affects not only Tezos but also other proof-of-stake networks.
The Future of Crypto Taxation
The outcome of the Jarrett tax dispute will have significant implications for the crypto industry. It remains to be seen how this decision will impact other countries with similar tax laws and regulations. One thing is certain, however: the IRS has staked its ground on the issue of taxable income from staking rewards.
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