IRS confirms tax on staking rewards in $12,179 dispute

The United States Internal Revenue Service (IRS) has reaffirmed its stance on taxing staking rewards as income upon receipt, rejecting arguments presented in a lawsuit by Joshua and Jessica Jarrett.  

The couple filed the lawsuit seeking a $12,179 tax refund for taxes paid on 13,000 Tezos (CRYPTO:XTZ) tokens earned through staking in 2020.

They argued that staking rewards should be classified as property, not income, and taxed only upon sale or exchange.  

According to Bloomberg, the IRS cited Revenue Ruling 2023-14, which mandates that taxpayers report staking rewards as income based on their fair market value at the time they become sellable or exchangeable.

“New property is not taxable income; instead, taxable income arises from the proceeds from the sale of that new property,” the IRS stated.  

Staking involves locking cryptocurrency in a smart contract to secure blockchain networks, earning rewards typically in the form of additional tokens. The IRS considers these rewards taxable income from the moment they are received.  

This is not the first legal battle between the Jarretts and the IRS. In 2021, the couple challenged the agency over 8,876 Tezos tokens earned in 2019, arguing that staking rewards should be taxed only upon sale.

Although the IRS offered a $4,000 refund, the Jarretts declined, seeking to establish a broader precedent.

That case was eventually dismissed as moot.  

In their new complaint, the Jarretts seek a permanent injunction against the IRS’s current taxation approach for staking rewards, arguing that it conflicts with how the IRS treats other forms of newly created property.  

The outcome of this legal dispute could have significant implications for the taxation of digital asset staking in the United States.