Oral arguments in an appeals case against the United States Internal Revenue Service (IRS) regarding the taxation of earnings from staking tokens began on July 26. The case was filed by Joshua and Jessica Jarrett, a couple from Tennessee, who argued that the IRS had no right to tax income or profit from staked Tezos (XTZ) tokens as they were “created” and not sold. The couple initially reported the staked crypto as “other income” on their 2019 tax returns, resulting in a payment of $9,407. However, they later received a refund check from the IRS after filing a lawsuit challenging the taxation. But they refused to accept the check, leading to an appeal in November 2022.
In the first round of oral arguments, Chief Judge Jeffrey Sutton of the U.S. Court of Appeals for the Sixth Circuit questioned whether the IRS issued the refund as a strategy to “pick off taxpayers with very good lawyers.” If the court does not rule in their favor, the Jarretts could be forced to litigate annually, depending on their crypto activities, if the IRS rejects their claims on staking. The couple’s attorney, Cameron Norris, argued that the rule in tax cases is “pay first, litigate later” and criticized the government for stating that Mr. Jarrett’s tax position is wrong outside of the litigation.
The initial complaint brought by the Jarretts alleged that the IRS was taxing creative endeavors such as “newly created cakes, books, or tokens” as income. Many individuals and organizations in the cryptocurrency industry expressed support for the couple’s case. ConsenSys, a software firm, released a statement endorsing the continuation of the Jarrett tax case and emphasizing that crypto users deserve fair treatment under the tax code.
The legal battle between the Jarretts and the IRS highlights the ongoing debate and ambiguity surrounding the taxation of cryptocurrency transactions and activities. The emergence of new technologies and financial instruments, such as staking tokens, has created challenges for tax authorities in defining the appropriate tax treatment. As the use of cryptocurrencies continues to grow, governments around the world are grappling with how to regulate and tax this burgeoning sector.
Cryptocurrency taxation laws and regulations remain fragmented and inconsistent globally, with different jurisdictions adopting various approaches. In the United States, the IRS treats cryptocurrencies as property, subject to capital gains taxes when sold or exchanged. However, there is still uncertainty when it comes to more complex transactions, such as staking or mining, where the tax implications may not be clearly defined.
To help taxpayers navigate the complex landscape of cryptocurrency taxation, the IRS has published guidelines and reminders emphasizing the need to report cryptocurrency income. These efforts aim to ensure that individuals and businesses are complying with their tax obligations and accurately reporting their crypto-related activities. However, as demonstrated by the ongoing Jarrett case, there are still gray areas and legal disputes surrounding the taxation of specific crypto-related activities.
As the appeals case continues, the outcome could have significant implications for the treatment of staking tokens and potentially set a precedent for future tax disputes in the cryptocurrency space. The crypto community will be closely watching the developments in this case, hoping for clarity and fair treatment under the tax code. Ultimately, the resolution of these issues will play a crucial role in shaping the regulatory framework for cryptocurrencies and determining how they are taxed in the years to come.