Nashville Couple Sues IRS Over Tezos Staking Rewards Tax

The lawsuit could have far-reaching implications for the taxation of staking rewards in the U.S.

May 26, 2021 at 4:40 p.m. UTC
Updated Sep 14, 2021 at 1:02 p.m. UTC

A couple in Nashville, Tenn., has filed a lawsuit against the U.S. Internal Revenue Service (IRS) over tax they paid on rewards for staking on the Tezos blockchain.

Joshua and Jessica Jarrett are requesting a refund of income tax paid in 2019 totaling $3,293 for the receipt of 8,876 tezos tokens, according to a legal complaint shared by a spokesperson for the Proof of Stake Alliance (POSA), an advocacy group aiming to bring legal and regulatory clarity to PoS technology. The Jarretts are also seeking a $500 increase in tax credits for lost income.

This is the first major suit filed against the IRS related to crypto staking rewards, the spokesperson told CoinDesk Wednesday.

The case has potentially far-reaching implications for how contributors to proof-of-stake (PoS) blockchains are taxed for the tokens they receive. The outcome could resonate with users of the much larger Ethereum blockchain once it switches to a PoS mechanism, expected later this year.

CoinDesk - Unknown

In the Tezos system, the equivalent of Bitcoin's miners are known as "bakers."

The Jarretts say they should not have been taxed on the tezos tokens until they were sold or exchanged. Federal income tax laws do not permit the taxation of tokens created through a staking enterprise, according to the document.

"Like a baker who bakes a cake using ingredients and an oven, or a writer who writes a book using Microsoft Word and a computer, Mr. Jarrett created a property," the document says. (In the Tezos system, the equivalent of Bitcoin's miners are known as "bakers.")

Just as pastry makers and writers are not taxed on the property they create, but on the income from sales, "Mr. Jarrett will realize taxable income when he first sells or exchanges the new property he created," the complaint reads.

"This is an issue of practical and economic importance," POSA founder Evan Weiss said. "The wrong policy would drive innovation elsewhere ... Fortunately, the correct policy is set under existing laws."

The IRS has yet to issue specific guidance on the taxation of crypto assets where staking is involved. Four lawmakers wrote to the agency in July 2020 asking for assurance that stakers would not face tax liabilities for receiving block rewards until those rewards are sold.

CORRECTION (May 26, 16:50 UTC): An earlier version of this article gave the wrong first name for Ms. Jarrett. It is Jessica, not Jackie.


Read more about
The Festival for the Decentralized World
Thursday - Sunday, June 9-12, 2022
Austin, Texas
Save a Seat Now

DISCLOSURE

Please note that our privacy policy, terms of use, cookies, and do not sell my personal information has been updated.

The leader in news and information on cryptocurrency, digital assets and the future of money, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups. As part of their compensation, certain CoinDesk employees, including editorial employees, may receive exposure to DCG equity in the form of stock appreciation rights, which vest over a multi-year period. CoinDesk journalists are not allowed to purchase stock outright in DCG.

Trending

1
CoinDesk - Unknown
First Mover Asia: Crypto Carbon Trading Is Racing to Clean Up Its Act; Cryptos Drop Even as Stocks Rise

Carbon credit protocols have had a difficult time in recent months but have been working to improve the way they operate; bitcoin outperformed other major cryptocurrencies in Thursday trading.

Carbon credit protocols have had a difficult time in recent months but have been working to improve the way they operate; bitcoin outperformed other major cryptocurrencies in Thursday trading.

CoinDesk - Unknown
2
CoinDesk - Unknown
Terra Devs Need a Home. Other Blockchains Are Courting Them

Armed with multimillion-dollar ecosystem funds, chains like Polygon and Kadena are trying to woo coders whose work is endangered by Terra’s meltdown.

Armed with multimillion-dollar ecosystem funds, chains like Polygon and Kadena are trying to woo coders whose work is endangered by Terra’s meltdown.

CoinDesk - Unknown
3
CoinDesk - Unknown
Circle Recommends Against a Digital Dollar, and Ethereum Beacon Chain Suffers Longest ‘Reorg’ in Years

The most valuable crypto stories for Thursday, May 26, 2022.

The most valuable crypto stories for Thursday, May 26, 2022.

CoinDesk - Unknown
4
CoinDesk - Unknown
Huobi Acquires Latin American Crypto Exchange Bitex

The Chinese crypto exchange is seeking to expand in Latin America, but Bitex will continue to operate under the same name and with its current management team.

The Chinese crypto exchange is seeking to expand in Latin America, but Bitex will continue to operate under the same name and with its current management team.

CoinDesk - Unknown