Crypto stakers Josh and Jessica Jarrett have refiled a lawsuit against the IRS, arguing that tokens earned through staking should be taxed only upon sale, not creation.
Josh Jarrett and his wife Jessica Jarrett, both Tezos network stakeholders, have once more initiated litigation against the Internal Revenue Service regarding its tax treatment of their tokens.
In a new complaint filed on October 10 in a federal court in Tennessee, the Jarretts contend that their tokens, generated through staking, should be considered property and subject to taxation only upon their sale rather than before it.
According to them, staking tokens entails the creation of a “new property” because no one has previously owned them. This renders them equivalent to “a farmer’s crop, an author’s manuscript, or a manufacturer’s product,” in which no income is generated until their sale.
“New property is not taxable income; instead, taxable income arises from the proceeds from the sale of that new property. In all other contexts, the IRS recognizes that new property is not taxable income,” the Jarretts said.
Block rewards, such as staking, are classified as “income” by the IRS in 2023 guidance. Tax is due on the anticipated market value of the tokens at the time of creation.
The Jarrets seek a permanent injunction against the IRS from treating tokens they created as income, a refund for $12,179 in taxes paid on 13,000 Tezos tokens earned in the 2020 tax year, and a judgment proclaiming previous federal income taxes incorrectly assessed.
The Coin Center, a Washington, DC-based think organization, supports the couple in their litigation.
In a statement issued on October 9, Coin Center stated that it supports the assertion, citing the “tremendous power” of tax laws and the interpretations of those laws by federal agencies to discourage the use of cryptocurrency and permissionless technologies by Americans.
“Some of this is inevitable unless laws are altered, which is why we have advocated for legislative reforms such as the Virtual Currency Tax Fairness Act, which would establish a de minimis exemption for small personal crypto transactions,” it continued.
In 2021, the Jarrets initiated their legal dispute with the IRS by suing the agency regarding 8,876 Tezos tokens they acquired as staking rewards in 2019.
They did not sell or exchange the tokens then; however, they paid the IRS the estimated tax bill of $9,407.
They subsequently filed a lawsuit to obtain a refund of $3,293 and a $500 increase in tax credits due to a decrease in their income.
After offering the Jarretts a $4,000 tax refund for income taxes paid on their Tezos staking rewards, the IRS effectively dismissed the case in a Tennessee District Court in 2022.
They declined, to litigate the case in court and establish a legal precedent for all proof-of-stake chains.
The IRS contended that it had issued a complete $4,000 refund and acknowledged that the Jarretts were not liable for tax on the 2019 staking rewards, rendering the case “moot.”
The Jarretts unsuccessfully attempted to have the original lawsuit reinstated on appeal prior to this most recent case.
