IRS Declares Crypto Staking Rewards as Taxable Income
In a groundbreaking announcement detailed in the latest Bloomberg report, the Internal Revenue Service (IRS) has officially declared that cryptocurrency staking rewards are subject to taxation. This decision clarifies that tax liabilities emerge as soon as the staking rewards are received. This pivotal ruling is unveiled amid an ongoing legal dispute initiated by Joshua and Jessica Jarrett from Tennessee. The couple, who engage in staking on the Tezos network, have challenged the government’s stance on the tax implications of crypto staking and the IRS’s interpretation.
The Legal Challenge Against IRS Staking Taxation
The Jarretts’ lawsuit, which began in October and is closely monitored by the crypto community, could reshape the tax landscape for staking rewards on all proof-of-stake blockchains in the United States. In December, the IRS formally rejected the couple’s argument that staking creates "new property" that should only be taxed upon sale. The government firmly stated that staking a cryptocurrency incurs tax liability as soon as the staking rewards are realized, distinguishing them from commodities like crops, books, or manufactured goods.
The Background of the Jarretts’ Legal Dispute
This legal confrontation with the IRS traces back to 2021 when the Jarretts sought a refund for $3,293 in taxes paid on 8,876 Tezos tokens earned through staking in 2019. Their contention was that these tokens represented "new property," which, akin to a farmer’s harvest or an author’s manuscript, should be taxed only upon sale or exchange.
In an effort to dismiss the case in 2022, the IRS proposed a $4,000 tax refund for the income taxes paid on the Tezos rewards. The Jarretts, however, declined this offer, opting instead to pursue the lawsuit to establish a legal precedent that could benefit all participants in proof-of-stake networks. "After a year and a half, the government was unwilling to defend its stance that the tokens I created through staking were taxable income. I need a more definitive answer, so I rejected the government’s refund offer," explained Joshua Jarrett.
IRS Guidelines on Crypto Staking Rewards
According to updated IRS guidelines released in 2023, rewards generated from staking or mining are classified as taxable income at the time of their creation. The tax liabilities are determined based on the market value of the rewards at the point of creation. This clarification aims to provide more precise guidance to taxpayers involved in the burgeoning field of cryptocurrency staking.
The ongoing legal battle and the IRS’s ruling underscore the evolving nature of cryptocurrency taxation and its potential impact on investors and the broader blockchain ecosystem. As the case progresses, both the crypto industry and tax professionals are eager to see how this decision will shape the future of staking rewards taxation in the United States.
