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Pending Court Case Could Impact Taxation of Crypto Staking Rewards

A current court case regarding taxation of cryptocurrency staking could have long-lasting ripple effects throughout the crypto community.

The lawsuit (Jarrett v. United States) filed by a Tennessee couple claims staking rewards should not be counted as income. Crypto staking is a way of earning rewards for holding certain cryptocurrencies on proof-of-stake blockchains, e.g., Cardano, Tezos, Solana.

The Jarretts argue the Federal income tax law does not permit the taxation of tokens created through a staking enterprise because the result of staking is creation of new property that should only be taxed at the time of sale. The lawsuit gives the example of an author who writes a book is not taxed once the book is complete but instead when the book is sold.

The couple reported on their 2019 tax return the $9,407 worth of 8,876 Tezos staking rewards received, counted the $9,407 as income, and paid the related taxes.

However, the couple later filed an amended return arguing the $9,407 worth of rewards shouldn’t have been counted as income and sought a $3,793 refund from the IRS.

The IRS has offered to pay the refund, essentially conceding the refund in order to have the lawsuit dismissed, but the Jarretts have refused the refund in order to proceed with the lawsuit in hopes of a formal court ruling to set the precedent for all taxpayers that the IRS may no longer attempt to tax staking rewards.

Though the court case is pending, a ruling in favor of the Jarretts could establish a major precedent for the future taxation of proof-of-stake miners and stakers if the IRS cannot tax unsold, staked crypto.

However, the matter is not yet settled.

First, the IRS is proposing to concede the refund without addressing whether staking rewards are taxable at time of receipt. If the Court grants the IRS request, it would not provide the affirmative legal authority that US taxpayers could rely on.

Second, there is a chance that the matter proceeds on its merits and the Court ultimately issues a ruling unfavorable to US taxpayers.

At this point, the crypto community should be cautiously optimistic that the Court will allow the matter to proceed on the merits and allow for a favorable legal ruling.

The court has a status conference scheduled for 8 a.m. Pacific Time on Thursday, May 5, 2022, to discuss the issue, which Kugelman Law tax and crypto attorneys will be paying close attention to.

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