This is Why The IRS Claims Staking Rewards are Taxable

The IRS claims that tokens received from crypto staking are taxable, rebuffing a Tennessee lawsuit from investor Joshua Jarrett. Earlier this year, Jarrett won a favorable settlement from a 2022 lawsuit, but the IRS seems willing to fight a new battle.

Staking and restaking are on the rise in the crypto industry, and the verdict in this dispute will impact a growing constituency of US crypto users.

IRS Pursues Crypto Staking Rewards

Jarrett, who filed this lawsuit against the IRS in October, argued that tokens earned from crypto staking should legally qualify as new property, not taxable income. The lawsuit claims to seek a refund of $3,293 in taxes paid on 8,876 Tezos tokens earned through staking

In 2022, Jarrett filed a similar lawsuit. The dispute was resolved in Jarrett’s favor, but not in such a way that it created a legally binding precedent.

“Before the parties reached oral argument, the government granted Jarrett’s refund request and directed the IRS to schedule an overpayment. The government then moved to dismiss the case (claiming that the full refund resolved the dispute), which the district court sustained,” a law firm’s coverage of the incident stated.

However, crypto staking has grown quickly in the space, and the IRS has revisited this stance. In 2023, it released Revenue Ruling 2023-14, claiming that staking rewards are part of a taxpayer’s gross income. Jarrett filed another lawsuit, but this time, the IRS is preparing to fight it.

The IRS argues that staking should induce a tax liability as soon as it’s conducted, regardless of when the profit is realized. It claims that staking activities do not create new property. The tax agency added that Jarrett “should have to pay taxes on the value of tokens upon receipt,” further clarifying its stance.

With the year drawing to a close, tax agencies’ treatment of the crypto space is a particularly salient issue. Jarrett’s staking lawsuit is just one component: the IRS has significantly altered its crypto policies this year. The IRS created a new form to report gains, hiring industry experts and commissioning AI tools to crack down on tax evasion.

Currently, there is no further information as to how long this dispute might take or whether the two parties might resolve it with another settlement like in 2022.

However, the result will impact a growing contingent of US crypto enthusiasts. If the IRS fails to defeat Jarrett’s argument on staking, it would represent a powerful win.