Judge implies IRS gave $4K refund based on lawyer quality: Report

Judge implies IRS gave $4K refund based on lawyer quality: Report

The IRS and the Taxation of Staking Income in the Blockchain Industry

In recent years, the blockchain industry has witnessed significant growth, with cryptocurrencies becoming increasingly popular and diverse. However, as the industry evolves, so do the complexities surrounding taxation and regulatory frameworks. One such case is the ongoing legal battle between the United States Internal Revenue Service (IRS) and a Tennessee couple, Joshua, and Jessica Jarrett, who have raised concerns about the taxation of earnings from staking tokens.

The Background

The Jarretts initially reported their staked Tezos (XTZ) tokens as “other income” on their 2019 tax returns, resulting in a payment of $9,407. However, they later filed a lawsuit against the IRS, arguing that the tokens were “created” and not sold, and therefore should not be subject to taxation. The IRS eventually paid the couple a partial refund of approximately $4,000, effectively ending the case in September 2022. However, the Jarretts refused to accept the check, which has since expired, and filed an appeal in November 2022 to seek a ruling that would protect them from future tax liabilities related to staking activities.

The appeals case began with oral arguments on July 26, and Chief Judge Jeffrey Sutton of the U.S. Court Appeals for the Sixth Circuit expressed concerns about the IRS’s actions. He suggested that the refund given to the Jarretts might have been a strategic move by the IRS to “pick off taxpayers with very good lawyers.” This implies that without a ruling in favor of the Jarretts’ initial complaint, they may be required to pursue legal action annually, depending on their crypto activities, if the IRS rejects their claims related to staking.

Cameron Norris, representing the Jarretts in appeals court, highlighted the issue of tax liability in the crypto industry. He emphasized that individuals are generally expected to pay taxes first and litigate later. Norris argued that the IRS should not have the power to determine the tax positions of individuals unilaterally. He stated, “Mr. Jarrett has this problem every single year, and the government outside of this litigation is saying that his tax position is wrong.”

Key Arguments and Support

The Jarretts’ initial complaint raised concerns about the IRS’s taxation of creative endeavors, comparing staked cryptocurrencies to “newly created cakes, books, or tokens.” This assertion attracted support from various entities within the blockchain industry. One notable supporter was ConsenSys, a leading software firm in the crypto space. They argued that crypto users deserve fair treatment under the tax code, emphasizing the need for clarity and consistency in the IRS’s approach to taxing crypto income.

Understanding Staking and its Tax Implications

To grasp the significance of the Jarretts’ case, we must understand the concept of staking and its tax implications. Staking refers to the process of validating and securing transactions on a blockchain network by holding a certain amount of tokens in a wallet. In return for staking their tokens, participants can earn additional tokens as rewards, similar to earning interest or dividends. However, the precise taxation of staking income remains a complex subject.

Under the current U.S. tax framework, staking rewards are generally considered as ordinary income and subject to taxation. However, the determination of when and how staking rewards are taxed can vary depending on several factors, such as whether the staked tokens are considered investment property or if they are treated as newly created assets. The lack of clear guidelines from the IRS on this matter has created confusion and uncertainty for crypto users.

The Need for Clear Taxation Guidelines

The ongoing legal battle between the Jarretts and the IRS underscores the urgent need for clear and comprehensive taxation guidelines in the blockchain industry. As the industry continues to expand and evolve, regulators and tax authorities must adapt to the unique characteristics of cryptocurrencies and blockchain-based activities. Failure to provide adequate guidance could stifle innovation and discourage individuals from engaging in crypto-related activities.

To address this issue effectively, it is crucial for tax authorities to collaborate with industry participants, legal experts, and blockchain technologists. By working together, they can develop practical and fair taxation guidelines that strike a balance between ensuring compliance and fostering continued growth in the blockchain industry.

Resources for Tax Filings in the Crypto Space

Given the complexity of tax filings in the crypto space, it is essential for individuals to stay informed and up-to-date with regulatory requirements. Resources such as guides and informative articles can provide valuable insights. For example, Cointelegraph offers an informative guide on cryptocurrency tax regulations and requirements in the United States, Europe, and other regions1. Such resources can help individuals navigate the complexities of cryptocurrency taxation and ensure they comply with the applicable regulations.

Conclusion

The ongoing legal battle between the Jarretts and the IRS highlights the challenges surrounding taxation in the blockchain industry. As the industry matures and attracts more participants, it is essential for regulators and tax authorities to establish clear and practical guidelines. This will ensure that individuals engaging in blockchain activities have a solid understanding of their tax obligations. Collaboration between industry stakeholders and regulatory bodies is crucial to strike the right balance between taxation and fostering innovation in the blockchain industry.

“Are you up-to-date on your cryptocurrency tax filings? Learn about the regulations and requirements in the US, Europe, and with our informative guide.” – Cointelegraph2

“IRS reminds taxpayers of crypto income reporting ahead of 2022 filing” – Cointelegraph 3

“Best and worst countries for crypto taxes — plus crypto tax tips” – Magazine 4


  1. Cointelegraph Crypto Tax Guide↩︎

  2. Cointelegraph Crypto Tax Guide↩︎

  3. IRS reminds taxpayers of crypto income reporting ahead of 2022 filing↩︎

  4. Best and worst countries for crypto taxes — plus crypto tax tips↩︎

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