The U.S. Internal Revenue Service (IRS) has reinforced its position on taxing cryptocurrency staking rewards, rejecting a legal argument that such rewards should only be taxed when sold or exchanged.
A Dec. 23 report from Bloomberg reveals that the IRS dismissed claims from Joshua and Jessica Jarrett in their second lawsuit against the agency. The IRS contends that staking rewards are taxable as income at the time of receipt, stating:
“Revenue Ruling 2023-14 requires taxpayers who receive staking rewards to report the rewards as income at their fair market value upon having the ability to sell, exchange, or otherwise dispose of them.”
Staking involves locking cryptocurrency in a digital wallet to support blockchain operations, such as transaction validation and network security. In return, participants earn rewards, typically in additional cryptocurrency, making it a popular method of generating passive income.
The IRS’s 2023 guidance stipulates that staking rewards are considered taxable income immediately upon creation, with their fair market value at the time determining the taxable amount.
The Jarretts’ Ongoing Dispute
The legal clash between the Jarretts and the IRS dates back to 2021. The couple initially sued the agency over taxes levied on 8,876 Tezos tokens they earned through staking in 2019.
Their argument compared staking rewards to a farmer harvesting crops or an author producing a manuscript — asserting these should be treated as property and taxed only when sold. The IRS responded with a $4,000 tax refund offer, which the Jarretts declined, seeking instead to establish a legal precedent for the broader cryptocurrency community. However, the court dismissed the case, citing the refund as rendering the matter moot.
Undeterred, the Jarretts filed a new lawsuit in October 2024. This time, they are demanding a $12,179 refund for taxes paid on 13,000 Tezos tokens earned in 2020. Additionally, they seek a permanent injunction against the IRS’s current approach to taxing staking rewards.
Their lawsuit argues:
“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.”
The outcome of this legal battle could have significant implications for how staking rewards and other digital asset-related earnings are taxed in the United States, potentially shaping future regulations in this evolving industry.
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