The IRS reaffirmed its position that rewards from staking activities are not considered new property and dismissed the arguments in a lawsuit seeking to defer taxes until the rewards are sold or exchanged.

According to a Bloomberg report on December 23, the IRS dismissed the arguments from the second lawsuit filed by Joshua Jarrett and his wife, Jessica Jarrett. The agency stated that rewards from staking will be treated as taxable income as soon as they are received. The IRS's official response stated:

The 2023-14 revenue ruling requires taxpayers who receive rewards from staking activities to report those rewards as income, at fair market value at the time they are capable of being sold, exchanged, or otherwise disposed of.

Staking and income tax

Staking is the process of locking cryptocurrency into a smart contract to support the operation and security of a blockchain. In return, participants can receive rewards, often in the form of additional cryptocurrency, as a way to earn passive income from holding digital assets. According to the IRS's 2023 guidance, rewards from staking activities—including block rewards—are considered "income" as soon as they are created, and taxes will be assessed based on the market value of the tokens at that time.

The Jarrett family's tax dispute

The Jarrett family's tax dispute began in 2021 when the couple sued the IRS over its handling of taxes on 8,876 Tezos (XTZ) they earned in 2019 through staking. They argued that these tokens, like a farmer's harvest or a writer's manuscript, should be considered property and only taxed when sold. However, the IRS responded by offering a $4,000 tax refund, which the Jarrett family rejected in order to create a legal precedent for networks using the Proof of Stake mechanism. The court later dismissed the case, ruling it was invalid due to the refund offer.

In October 2024, the Jarrett family filed a second lawsuit, seeking a declaration that their staking rewards would be considered property and only taxed when sold. In the new complaint, they requested a refund of $12,179 in taxes paid on 13,000 XTZ tokens earned in the 2020 tax year, while also asking the court to issue a permanent injunction against the IRS's current tax treatment of these tokens. The lawsuit argued that:

"New property is not taxable income; instead, taxable income arises from the proceeds of selling that new property. In all other contexts, the IRS acknowledges that new property is not taxable income."

This legal battle could create important precedents for how taxes on digital assets are handled in the United States. The court's decision will have far-reaching implications for determining how taxes are assessed on rewards from staking activities, thus impacting the entire DeFi community and cryptocurrency investors in the U.S.

https://tapchibitcoin.io/irs-tai-khang-dinh-phan-thuong-staking-crypto-phai-chiu-thue.html