IRS Labels Crypto Staking as Taxable Amid Legal Dispute - Coin Index News

IRS Reaffirms Taxation on Cryptocurrency Staking Rewards

IRS Clarifies Stance on Crypto Staking Rewards

In a recent clarification, the United States Internal Revenue Service (IRS) has reinforced its position that rewards earned from cryptocurrency staking activities are subject to taxation immediately upon receipt. This development underscores the IRS’s firm stance that staking rewards are not considered new property and are therefore taxable as income as soon as they are generated.

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IRS Declares Immediate Taxation on Staking Rewards

According to insights from a Bloomberg report, the IRS has reiterated that digital asset staking rewards should be treated as taxable income as soon as they are accessible to the recipient. This decision is poised to have significant implications on how staking rewards are approached under U.S. tax laws.

IRS Dismisses Comparisons to Other Industries

The IRS has further clarified that the process of staking does not lead to the creation of new property. This refutes comparisons to agricultural, manufacturing, or creative processes, where new assets are typically created. Consequently, the IRS dismisses the argument that staking rewards should only be taxed upon their sale or exchange.

Details of the Ongoing Legal Dispute

The IRS’s stance is part of an ongoing legal dispute involving Joshua Jarrett and Jessica Jarrett, residents of Tennessee. The couple, who had staked cryptocurrency on the Tezos (XTZ) network, argued that their staking rewards should not be taxed until they are sold or exchanged. They compared their rewards to “new property,” similar to harvested crops or an author’s manuscript.

IRS’s Counterarguments

However, the IRS maintains that all rewards derived from staking activities are taxable upon receipt. In an official statement, the agency indicated: “Revenue Ruling 2023-14 requires taxpayers receiving staking rewards to report them as income at their fair market value as soon as they can sell, exchange, or otherwise dispose of them.”

Understanding Crypto Staking

For those unfamiliar, crypto staking involves locking up cryptocurrency within a blockchain network to assist in validating transactions and securing the network, with rewards earned in return. This is typically associated with proof-of-stake (PoS) or similar consensus mechanisms, providing participants an opportunity to earn passive income on their holdings.

Legal Background and Ongoing Cases

Initial Legal Action

The Jarretts’ legal confrontation with the IRS initiated in 2021 when they contested the taxation of 8,876 XTZ tokens earned as staking rewards in 2019. They contended that such rewards should be considered “new property” and taxed only upon their sale or exchange, drawing parallels to farming or manufacturing.

IRS’s Offer and the Jarretts’ Response

In response, the IRS offered a $4,000 tax refund to the couple, which was declined in hopes of setting a legal precedent for all proof-of-stake blockchain networks. The court subsequently dismissed the case, declaring it moot due to the refund.

Continuing Legal Challenges

In October 2024, the Jarretts filed another lawsuit, seeking a $12,179 tax refund for taxes paid in 2020 on approximately 13,000 XTZ tokens earned through staking. They also pursued a permanent injunction against the IRS’s existing tax treatment of staking rewards. This ongoing case might shape future tax policies concerning crypto staking rewards in the United States.

Broader Context of Crypto Taxation

While some might perceive the IRS’s actions as aggressive towards crypto investors, the agency has implemented various measures to facilitate crypto tax filing for taxpayers. However, legal authorities in the U.S. are indeed pursuing individuals suspected of engaging in activities like crypto tax evasion.