The US tax regulator, the Internal Revenue Service (IRS), has reaffirmed its position on cryptocurrency staking, stating that rewards earned from staking activities are subject to taxation as soon as they are received. This clarification comes as the IRS continues to navigate the complex landscape of digital assets and their tax implications.
According to a recent report by Bloomberg, the IRS emphasized that staking rewards should be treated as income and taxed immediately upon being generated and made available to the recipient. This decision is expected to have significant implications for how staking rewards are treated under US tax laws.
The IRS made it clear that staking does not result in the creation of new property, debunking comparisons to activities like farming, manufacturing, or creative works. This stance directly challenges the argument put forth by Tennessee residents, Joshua Jarrett and Jessica Jarrett, who contended that their staking rewards should only be taxed when they are sold or exchanged for other assets.
The ongoing legal dispute between the Jarretts and the IRS revolves around the taxation of staking rewards earned on the Tezos (XTZ) network. The couple argued that their rewards should be considered “new property” and therefore not taxable until they are monetized. However, the IRS countered that all rewards generated through staking activities are taxable income upon receipt.
In a statement, the IRS referenced Revenue Ruling 2023-14, which mandates taxpayers to report staking rewards as income at their fair market value once they have the ability to sell, exchange, or dispose of them. This guidance underscores the importance of tracking the value of tokens earned through staking activities to determine the tax liability accurately.
The Jarretts’ legal battle with the IRS began in 2021 when they filed a lawsuit over the taxation of XTZ tokens earned as staking rewards. Despite their efforts to challenge the IRS’s stance, the court ultimately dismissed the case, ruling it moot due to a tax refund offered to the couple.
In a subsequent lawsuit filed in October 2024, the Jarretts sought a tax refund for taxes paid on XTZ tokens earned through staking in 2020 and requested a permanent injunction against the IRS’s current tax treatment of staking rewards. This ongoing case could have broader implications for how crypto staking rewards are taxed in the US.
While the IRS has made efforts to streamline the process of filing crypto taxes, it is also cracking down on individuals suspected of engaging in malicious activities, including crypto tax evasion. Recently, an individual was sentenced to two years in prison for failing to report capital gains from crypto sales between 2017 and 2019.
As the regulatory landscape around cryptocurrencies continues to evolve, it is essential for investors and stakeholders to stay informed about the tax implications of their activities. The IRS’s stance on crypto staking rewards underscores the need for clear guidelines and compliance in the rapidly growing digital asset space.