Tezos Stakers Sue IRS Over Tax Treatment Of Staking Rewards

According to Cointelegraph, Tezos network stakers Josh Jarrett and his wife Jessica Jarrett have filed a new lawsuit against the Internal Revenue Service (IRS) regarding the tax treatment of their staking rewards. The complaint, filed on October 10 in a Tennessee federal court, argues that tokens created through staking should be considered property and taxable only upon their sale, not at the moment of creation. The Jarretts contend that staking tokens involves creating 'new property,' similar to a farmer's crop, an author's manuscript, or a manufacturer's product, where no income is generated until the property is sold. They argue that new property should not be considered taxable income until it is sold, a principle they claim the IRS recognizes in other contexts. The IRS's 2023 guidance lists block rewards, such as those from staking, as income at the moment they come into existence, with taxes payable based on the estimated market value of the tokens at that time. The Jarretts are seeking a judgment declaring that previous federal income taxes were incorrectly assessed, a refund of $12,179 for taxes paid on 13,000 Tezos tokens earned in the 2020 tax year, and a permanent injunction against the IRS treating tokens created through staking as income. The Washington, DC-based think tank Coin Center is assisting the Jarretts in their litigation. Coin Center stated on October 9 that it supports the claim, arguing that current tax laws and federal agencies' interpretations of those laws can discourage Americans from using cryptocurrency and permissionless technologies. Coin Center has advocated for legislative changes, such as the Virtual Currency Tax Fairness Act, which would create a de minimis exemption for small personal crypto transactions. The Jarretts' legal battle against the IRS began in 2021 when they sued the agency over 8,876 Tezos tokens earned as staking rewards in 2019. Although they did not sell or exchange the tokens at the time, they paid an assumed tax bill of $9,407 to the IRS. They later filed a lawsuit seeking a refund of $3,293 and a $500 increase in tax credits due to a reduction in their income. In 2022, the IRS successfully had the case dismissed in a Tennessee District Court after offering the Jarretts a $4,000 tax refund for income taxes paid on their Tezos staking rewards. The Jarretts refused the refund, hoping to pursue the case in court to set a legal precedent for all proof-of-stake chains. The IRS argued that the case was moot after issuing the full $4,000 refund and conceding that the Jarretts were not liable for tax on the 2019 staking rewards. The Jarretts' attempt to have the original lawsuit reinstated on appeal was unsuccessful.