Taxation of Crypto Staking Rewards: IRS and Legal Disputes Unfold

The IRS has stated that rewards earned through staking cryptocurrencies should be taxed. This statement comes in response to a lawsuit filed by Joshua and Jessica Jarrett. The Jarretts challenged the 2023-14 revenue ruling, arguing that staking rewards should not be taxed until they are received. The IRS maintains that rewards should be reported as income at their fair market value when they are sold, exchanged, or disposed of. The case originated from the couple’s request for a refund of taxes paid on 8,876 Tezos tokens earned through staking in 2019. The court ultimately dismissed their case, and the couple filed a new lawsuit in October.

IRS Stance on Crypto Staking Taxation

The IRS reiterated that rewards from staking cryptocurrencies should be taxed upon receipt. This position was stated in response to the lawsuit filed by Joshua and Jessica Jarrett, who argued that staking rewards should not be taxed until they are sold or exchanged.

The lawsuit challenges the 2023-14 revenue ruling, which requires staking rewards to be included in the taxpayer’s gross income for the year they are received. The IRS emphasized that staking constitutes income and should be reported:

“The 2023-14 revenue ruling requires taxpayers who receive staking rewards to report them as income at their fair market value when they have the ability to sell, exchange, or otherwise dispose of the rewards.”

Staking involves locking cryptocurrencies in a smart contract to support blockchain operations, such as validating transactions and securing the network. Investors earn rewards as compensation for contributing to network security, making it a popular method for generating passive income from digital assets.

The lawsuit between Joshua and Jessica Jarrett and the IRS dates back to 2021, when the couple requested a refund of $3,293 in taxes paid on 8,876 Tezos tokens earned through staking in 2019. They argued that these tokens should not be taxed until sold.

The IRS initially offered a refund, but the Jarretts declined, seeking to establish a legal precedent for staking taxation. In August 2023, the IRS issued a full refund, and the Sixth Circuit Court dismissed the case.

However, the Jarretts filed a new lawsuit in October, challenging the taxation of staking rewards.

The IRS’s stance on crypto staking comes amid recent achievements celebrated by the cryptocurrency industry following the November presidential election. This includes the re-election of Donald Trump, seen by many as a positive signal for reducing regulatory restrictions on cryptocurrencies.

Additionally, the resignation of SEC Chairman Gary Gensler, often criticized for his strict stance on digital assets, further fueled excitement in the crypto market. These developments have sparked hopes for a more crypto-friendly regulatory environment in the coming years.

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