Blockchain Week In Review

United States

IRS offers Tennessee couple tax refund over unsold staking rewards

Last week, in a closely watched federal court case in the U.S. District Court for the Middle District of Tennessee, the IRS offered a taxpayer who had paid tax on staking rewards a refund, but the taxpayer has reportedly rejected the offer.

The plaintiff, Joshua Jarrett, obtained certain cryptocurrency tokens by staking in 2019 and paid taxes on 8,876 tokens within the Tezos blockchain. “Staking” is a way of earning rewards for holding certain cryptocurrencies. It is a process of actively participating in transaction validation (similar to mining), and by verifying transactions in a blockchain network, the staker can earn passive income. Jarrett staked the 8,000 tokens and did not sell them through 2020. After paying income taxes on the tokens he staked, he sought a refund from the IRS, but the agency declined his request. Jarrett then decided to pursue his case in federal court, filing a complaint on May 26, 2021. The question before the district court was whether the receipt of staking rewards generates taxable income at the date the rewards are received. Jarrett argued that the government didn’t have the right to tax tokens he staked before the tokens were sold or exchanged. In court filings, Jarrett analogized his position to that of a baker who bakes a cake or an author who writes a novel before the baker or the author actually sells their creations.

On February 3rd, it was reported that the IRS offered to refund Jarrett’s money for the taxes paid on the staking rewards, but Jarrett rejected the offer. Unless a judge finally rules on whether tokens obtained in staking constitute taxable income, the matter may remain unsolved for other stakers in the future. Although a judicial opinion in this case may provide some much-needed clarity for stakers, the case could take years to litigate and is only binding precedent for taxpayers in the Middle District of Tennessee.

A trial is set for March 2023. The case is Jarrett v. United States, Case No. 3:21-cv-00419 (M.D. Tenn.).

Recent letters exchanged between Jarret’s counsel and the IRS can be found here.

The complaint can be read here.…

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