The Internal Revenue Service (IRS) has reiterated its position that rewards from staking activities do not constitute new property, opposing a legal challenge that sought to defer taxes until rewards are sold or exchanged.
According to a Dec. 23 Bloomberg report, the agency denied arguments from a second lawsuit brought by Joshua Jarrett and his wife, Jessica Jarrett. The agency claimed that rewards constituted taxable income upon receipt. The IRS’s response states:
“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 process of locking up your cryptocurrency in a wallet to help run a blockchain. By doing this, you help verify transactions and secure the network. In exchange, you earn rewards, usually in the form of more cryptocurrency. It’s a way to earn passive income from digital asset holdings.
According to the IRS’s 2023 guidance, block rewards — like staking — are classified as “income” from the moment they are created, with tax based on the estimated market value of the tokens at the time.
Related: Consensys releases statement of support for continuation of the Jarrett tax case
The Jarretts’ tax dispute
The Jarrets’ tax dispute has been ongoing since 2021, when the couple filed the first lawsuit against the agency over 8,876 Tezos tokens earned as staking rewards in 2019.
They argued that these tokens, akin to a farmer’s crop or an author’s manuscript, should be considered property and taxed only upon sale. The IRS responded by offering a $4,000 tax refund, which the Jarretts declined, aiming to set a legal precedent for all proof-of-stake networks. The court later dismissed the case, deeming it moot due to the refund.
The Jarretts filed a second lawsuit in October 2024, seeking a declaration that their staking rewards should be treated as property and taxed only upon sale.
In the new complaint, they requested a refund of $12,179 for taxes paid on 13,000 Tezos tokens earned in the 2020 tax year, along with a permanent injunction against the IRS’s current tax treatment of their tokens. The lawsuit alleges:
“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 legal battle could set a precedent for how digital assets staking should be treated in the US.
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