According to Cointelegraph, the Internal Revenue Service (IRS) has maintained its position that rewards from cryptocurrency staking activities are taxable upon receipt, countering a legal challenge that sought to defer taxation until these rewards are sold or exchanged. This stance was reiterated in response to a lawsuit filed by Joshua and Jessica Jarrett, who argued that staking rewards should be considered new property and taxed only upon sale. The IRS, however, insists that these rewards are taxable income at their fair market value once the recipient has the ability to sell, exchange, or otherwise dispose of them.
Staking involves locking up cryptocurrency in a wallet to support the operation of a blockchain, which in turn helps verify transactions and secure the network. Participants earn rewards, typically in the form of additional cryptocurrency, as a form of passive income. The IRS's 2023 guidance classifies block rewards from staking as income from the moment they are created, with taxes based on the estimated market value of the tokens at that time.
The Jarretts' legal battle with the IRS began in 2021 when they filed a lawsuit over 8,876 Tezos tokens earned as staking rewards in 2019. They contended that these tokens should be treated like a farmer's crop or an author's manuscript, considered property and taxed only upon sale. The IRS offered a $4,000 tax refund, which the Jarretts declined, seeking to establish a legal precedent for all proof-of-stake networks. The court dismissed the case, citing the refund as rendering the issue moot.
In October 2024, the Jarretts filed a second lawsuit, requesting a declaration that their staking rewards should be treated as property and taxed only upon sale. They sought a refund of $12,179 for taxes paid on 13,000 Tezos tokens earned in the 2020 tax year and a permanent injunction against the IRS's current tax treatment of their tokens. The lawsuit argues that new property is not taxable income, and taxable income should arise only from the sale of that new property. This ongoing legal dispute could potentially set a precedent for how digital asset staking is treated under U.S. tax law.
