- The IRS maintains that cryptocurrency staking rewards are taxable income upon receipt, sparking ongoing legal tensions.
- Joshua and Jessica Jarrett argue staking rewards should be taxed only upon sale, comparing them to a farmer’s harvest or an author’s manuscript.
- A ruling in favor of the Jarretts could reshape crypto tax policies, while an IRS victory would reinforce the current taxation framework.
The United States Internal Revenue Service (IRS) has reaffirmed its position that cryptocurrency staking rewards are to be considered taxable income, thereby heating up a legal battle with wide ramifications for the crypto market. The IRS considers staking rewards to be taxable income upon receipt, whereas the couple Joshua and Jessica Jarrett challenge this policy in court by arguing the opposite.
According to a Dec. 23 report by Bloomberg, the IRS rejected an argument by the Jarretts that staking rewards constitute property in some ways to the fruits of a farmer’s orchard, or for that matter an author’s manuscript should face tax only upon their sale or disposition. That view was hammered home throughout the IRS response:
“Revenue Ruling 2023-14 requires taxpayers who receive staking rewards to report the rewards as income at their fair market value upon having the ability to sell, exchange, or otherwise dispose of them.”
Staking is the fundamental process of most Proof of Stake blockchain networks; it is a procedure whereby some cryptocurrency is locked into smart contracts to validate transactions and thereby keep the network secure. A very common reward for staking is giving participants additional cryptocurrency, thereby making passive income gained with staking very popular. The IRS has deemed this reward immediate taxable income in a highly controversial fashion.
IRS Faces Pushback on Crypto Tax Policy
The Jarretts’ case originated in 2021 when the couple filed a dispute with the IRS over the agency’s move to tax 8,876 Tezos (XTZ) tokens they received as staking rewards in 2019. They contended that staking rewards were “new property” and should not be subject to tax until sold. An attempt by the IRS to settle the matter with a $4,000 refund offer was rejected by the Jarretts, who were holding out for a broader precedent that would benefit the wider crypto community. The case was ultimately dismissed as moot due to the refund.
Undeterred, the Jarretts launched a second lawsuit in October 2024, this time requesting a $12,179 refund for taxes paid on 13,000 XTZ tokens earned in 2020. The lawsuit also seeks a permanent injunction against the IRS’s current policy, arguing:
“New property is not taxable income; instead, taxable income arises from the proceeds from the sale of that new property. In all other contexts, the IRS recognizes that new property is not taxable income.”
The eventual outcome of the Jarretts’ legal battle might reshape the taxation framework concerning staking rewards in the United States. A possible ruling for the Jarretts would open the door toward a more lenient tax regime that could encourage increased participation in proof-of-stake networks. If the IRS wins the case, though, that may just seal the status quo in current tax requirements for stakers and may affect the attractiveness of this investment strategy.
The Jarretts case highlights the urgent need for clarity and consistency in regulatory guidance as the crypto industry keeps evolving. With billions of dollars locked in staking across blockchains, the stakes are high—not only for individual taxpayers but also for the greater ecosystem.
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