Josh Jarrett questions the US IRS’s tax policy for crypto staking rewards, suggesting they should be taxed only upon sale, not receipt.
The U.S. Internal Revenue Service (IRS) is once again facing legal action concerning its policy on taxing cryptocurrency staking rewards.
On October 10, 2024, Josh Jarrett, supported by Coin Center, filed a new lawsuit challenging the IRS’s stance on taxing block rewards as income upon receipt.
IRS Faces New Lawsuit Over Crypto Staking Tax
The lawsuit, filed on Thursday, highlights the IRS’s approach to block rewards—newly minted cryptocurrency tokens given to validators who add blocks to a blockchain.
The IRS considers these rewards taxable income when received, a policy that Jarrett and Coin Center argue is unjust.
The lawsuit claims block rewards should be treated as newly created property and only taxed when sold or exchanged for cash.
Jarrett argues that this principle should apply to other forms of newly created property, such as crops or minerals, which are taxed only after they are sold.
The suit contends that taxing staking rewards before they are sold results in over-taxation and places unnecessary regulatory burdens on cryptocurrency node operators.
Previous Challenges to IRS Policy
This lawsuit marks Jarrett’s second attempt to challenge the IRS’s stance on staking rewards. In 2021, he filed a similar case after the IRS failed to clarify how staking rewards should be taxed.
The IRS issued Jarrett a refund for a previous year’s tax payment but did not provide guidance for future tax years.
In 2023, however, the IRS introduced new guidelines, declaring that staking rewards would be treated as taxable income when received—contradicting its earlier refund decision.
Jarrett, who participates in the Tezos network as a validator, received approximately 13,000 Tezos tokens through staking by the end of 2020.
He argues that these tokens should not be considered income when received, as they are new property and should only be taxed once sold.
The IRS’s current policy impacts users of Bitcoin and other cryptocurrencies utilizing proof-of-stake systems, such as Tezos.
The lawsuit argues that the policy is burdensome for taxpayers, forcing them to value each reward they receive, regardless of their intention to sell.
Legislative Efforts and IRS Policy Changes
Concerns about the IRS’s anti-competitive stance hampers decentralized networks and innovation growth.
In networks where staking rewards are distributed among many users, taxing the entire value of newly created tokens as income is less justifiable.
This lawsuit comes amid ongoing debates over the appropriate legal framework for taxing digital currencies.
In early 2024, a bill proposed in the House of Representatives suggested that taxes on staking rewards should only apply when tokens are sold.
The lawsuit seeks to compel the IRS to adjust its policy before legislative processes are finalized, aiming to make the tax treatment of staking rewards more reasonable.
Starting in 2025, the IRS will also implement new reporting requirements for crypto brokers, exchanges, and wallet providers to disclose customer transactions and gains.
These rules will include high-value non-fungible tokens (NFTs) and stablecoin transactions, broadening the scope of digital asset taxation.
