December 23, 2024

The IRS is claiming that tokens received from cryptocurrency staking are taxable, dismissing a Tennessee lawsuit from investor Joshua Garrett. Earlier this year, Garrett won a favorable settlement from a 2022 lawsuit, but the IRS appears poised to take up a new fight.

Storing and re-storing is on the rise in the cryptocurrency industry, and the ruling in this dispute will impact a growing number of cryptocurrency users in the United States.

IRS Seeks Cryptocurrency Staking Rewards

Jarrett, who filed the lawsuit against the IRS in October, argued that tokens acquired through cryptocurrency staking should legally be considered new property, not taxable income. The lawsuit claims it seeks to recover $3,293 in taxes paid on 8,876 Tezos tokens acquired through staking.

In 2022, Jarrett filed a similar lawsuit. The dispute was resolved in Jarrett's favor, but not in a way that would create a binding legal precedent.

“Before the parties reached oral argument, the government granted Garrett’s refund request and directed the IRS to schedule the overpayment. The government then moved to dismiss the case (claiming that the full refund resolved the dispute), which the district court upheld,” a law firm’s coverage of the incident said.

However, cryptocurrency staking has grown rapidly in the space, and the IRS has reconsidered this position. In 2023, it issued Revenue Ruling 2023-14, claiming that staking rewards are part of a taxpayer’s gross income. Jarrett has filed another suit, but this time, the IRS is preparing to fight it.

The IRS argues that staking should trigger a tax liability as soon as it is performed, regardless of when the profit is made. It claims that staking activities do not create new ownership. The tax agency added that Jarrett “should pay taxes on the value of the tokens when they are received,” further explaining its position.

As the year comes to a close, tax agencies’ treatment of the cryptocurrency space is a particularly salient issue. The Gerrit staking case is just one element: The IRS has significantly changed its policies on cryptocurrencies this year. The IRS has created a new reporting model for profits, hired industry experts, and commissioned AI tools to crack down on tax evasion.

Currently, there is no additional information on how long this dispute may take or whether the parties may resolve it with another settlement such as in 2022.

However, the outcome will have an impact on a growing group of crypto enthusiasts in the United States. If the IRS fails to defeat Gerrit’s argument on storage, it will be a strong victory.