IRS Maintains Staking Rewards Are Taxable Income Amid Legal Dispute
The IRS maintains that tokens earned from cryptocurrency staking are taxable income, despite a previous legal settlement in favor of investor Joshua Jarrett. Jarrett contends that staking rewards should be classified as new property rather than immediate taxable income, challenging the IRS's position in a new lawsuit. This case could set a precedent affecting US crypto investors amid increasing regulatory scrutiny.
In his latest lawsuit, Jarrett seeks a refund of $3,293 in taxes paid on 8,876 Tezos tokens earned through staking. This is not his first legal challenge; in 2022, he filed a similar lawsuit and received a refund. However, that case was dismissed without establishing a legal precedent, as the government issued the refund before oral arguments commenced.
Crypto staking has expanded rapidly, prompting the IRS to reassess its policies. In 2023, the agency released Revenue Ruling 2023-14, stating that staking rewards must be included as part of a taxpayer’s gross income upon receipt, regardless of whether the tokens are later sold or utilized. This ruling contradicts Jarrett's assertion that staking generates new property, which should not incur tax until realized through a sale.
The IRS insists that Jarrett is liable for taxes on the tokens at their market value when received, reinforcing its stance that staking does not create new taxable assets. This determination aligns with the IRS's broader initiative to enhance oversight of cryptocurrency activities. This year, the IRS introduced new reporting forms for crypto earnings, hired blockchain specialists, and began using AI tools to detect tax evasion.
The timeline for resolving this dispute is uncertain, but the implications are significant. If Jarrett prevails, it would mark a substantial victory for US crypto investors and could transform how staking rewards are taxed nationwide. Conversely, if the IRS succeeds, it will reinforce its authority to tax staking rewards as immediate income.
As crypto staking becomes increasingly common, the outcome of this case will directly impact thousands of US investors. With both parties preparing for legal proceedings, the crypto community observes closely, aware that the verdict could shape future regulations and taxation practices.