Cryptocurrency Staking Clarity on the Horizon? If At First You Don't Succeed…
By Jeffrey M. Glassman on October 23, 2024
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Jeffrey M. Glassman
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In February 2022, I wrote about the cryptocurrency staking case, Jarrett v. United States. A link to the prior blog can be found here. At issue in Jarrett was whether particular cryptocurrency tokens (Tezos) created through staking should be considered taxable income. The taxpayers said the newly created tokens were not taxable income, but the government took the opposite view. The government, for reasons that are not entirely clear (but I could speculate), attempted to render the case moot and refunded the Jarretts the entire amount in dispute. The Jarretts refused to accept the refund and insisted that the court rule on the underlying issue. Ultimately, the court sided with the government, holding that the Jarretts’ claim for relief was moot and dismissing the case. The Jarretts subsequently, but unsuccessfully, appealed the court’s dismissal.
In August 2023, the IRS released Revenue Ruling 2023-14 (IRB 2023-33 (link)) stating the IRS’s official position on the issue—which is contrary to the Jarretts’ position in their lawsuit. The Revenue Ruling held that tokens created from staking activities in certain blockchains are considered taxable income. Specifically, the IRS stated:
If a cash-method taxpayer stakes cryptocurrency native to a proof-of-stake blockchain and receives additional units of cryptocurrency as rewards when validation occurs, the fair market value of the validation rewards received is included in the taxpayer's gross income in the taxable year in which the taxpayer gains dominion and control over the validation rewards.
In light of the IRS’s Revenue Ruling on the issue, which demonstrates that the IRS position on the issue is contrary to the Jarretts’ position, the IRS is less likely to concede the case. Therefore, the court is much more likely to address the underlying legal issue.
At stake (pun intended) is an issue of major importance for many in the cryptocurrency space. As stated by the Jarretts, thousands of people use Tezos software. Other blockchains also rely on staking to make their blockchains function as intended. I hesitate to quantify just how massive this issue is, but it is undoubtedly of major importance.
If you have any questions about cryptocurrency tax issues, or any other civil or criminal tax issue, please contact me at jglassman@meadowscollier.com or (214) 749-2417.
In August 2023, the IRS released Revenue Ruling 2023-14 (IRB 2023-33 (link)) stating the IRS’s official position on the issue—which is contrary to the Jarretts’ position in their lawsuit. The Revenue Ruling held that tokens created from staking activities in certain blockchains are considered taxable income. Specifically, the IRS stated:
If a cash-method taxpayer stakes cryptocurrency native to a proof-of-stake blockchain and receives additional units of cryptocurrency as rewards when validation occurs, the fair market value of the validation rewards received is included in the taxpayer's gross income in the taxable year in which the taxpayer gains dominion and control over the validation rewards.
Earlier this month, the Jarretts filed another lawsuit against the government and once again claimed that creation of Tezos tokens through staking is not income. A link to the complaint is here. Once again, the Jarretts argue that creating new property—specifically, Tezos cryptocurrency tokens—are not income. The Jarretts succinctly argue that:
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. When a taxpayer creates new property—whether a farmer’s crop, an author’s manuscript, or a manufacturer’s product—he is not taxed until he sells it. Only upon sale of new property does income “come in.”
In light of the IRS’s Revenue Ruling on the issue, which demonstrates that the IRS position on the issue is contrary to the Jarretts’ position, the IRS is less likely to concede the case. Therefore, the court is much more likely to address the underlying legal issue.
At stake (pun intended) is an issue of major importance for many in the cryptocurrency space. As stated by the Jarretts, thousands of people use Tezos software. Other blockchains also rely on staking to make their blockchains function as intended. I hesitate to quantify just how massive this issue is, but it is undoubtedly of major importance.
If you have any questions about cryptocurrency tax issues, or any other civil or criminal tax issue, please contact me at jglassman@meadowscollier.com or (214) 749-2417.
