The Internal Revenue Service (IRS) has officially stated that rewards from cryptocurrency staking are taxable as soon as they are received. This statement has been made in light of the legal case involving Tennessee residents Joshua and Jessica Jarrett, who are staking on the Tezos network.
The Ruling and Its Context
In a December court filing, the IRS rejected the Jarretts' claim that staking generates 'new property' that should only be taxed upon sale. The government argues that staking a cryptocurrency induces tax liability as soon as it is done and does not consider staking tokens as analogous to crops, books, or manufactured goods.
Legal Implications for PoS Networks
This case is being closely watched by the crypto industry due to its potential to significantly impact how staking rewards are taxed across proof-of-stake blockchains in the U.S. The Jarretts began their legal battle in 2021, seeking a refund of $3,293 in taxes paid for 8,876 Tezos tokens earned through staking in 2019, before they were sold or exchanged.
The Jarretts' Case Development
In 2022, the IRS attempted to dismiss the case by offering the Jarretts a $4,000 tax refund for income taxes paid on their Tezos rewards. However, the Jarretts refused the refund, aiming to create a legal precedent for all staking participants in PoS networks. 'A year and a half into this process, the government didn't want to defend the position that the tokens I created through staking were taxable income. I need a better answer, so I refused the government’s offer to pay me a refund,' Jarrett stated.
In 2023, the IRS released guidelines stating that rewards from staking or mining are considered taxable income as soon as they are created, with tax liabilities determined by their market value at the time of creation.
