IRS says crypto staking should be taxed in response to lawsuit

In a filing on Monday, the US International Revenue Service (IRS) stated that the rewards gotten from staking cryptocurrencies should be taxed, responding to a lawsuit from couple Joshua and Jessica Jarrett.

IRS insists on crypto staking taxation

The IRS stated that rewards from cryptocurrency staking are taxable upon receipt, according to a Bloomberg report on Monday, which stated the agency rejected a legal argument that sought to delay taxation until such rewards are sold or exchanged.

The legal argument stems from a lawsuit filed by Joshua and Jessica Jarrett, a couple who asserted that staking rewards should not be taxed when received.

The suit aims to challenge Revenue Ruling 2023-14, which declares that staking rewards must be included in a person's gross income for the tax year in which they are received.

In its response, the agency emphasized that staking constitutes earnings and should be reported:

"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 up cryptocurrency in a smart contract to support blockchain operations, such as verifying transactions and securing the network. 

Investors earn yields as compensation for contributing to the network's security, making it a popular method for generating passive income from digital assets.

The lawsuit between Joshua and Jessica Jarrett and the IRS dates back to 2021 when the couple sought a refund of $3,293 for taxes paid on 8,876 Tezos tokens earned through staking in 2019. They argued that the tokens should not be taxed until sold. 

The IRS initially offered a refund, but the Jarretts declined, wanting a legal precedent for staking taxation. In August 2023, the case was dismissed by the Sixth Circuit after the IRS issued a full refund. 

However, the Jarretts filed a new lawsuit in October to challenge the taxes issued over staking rewards.

The IRS's position toward crypto staking comes amid the crypto industry's celebration of recent achievements following the presidential election in November. 

This includes Donald Trump's re-election, which many view as a positive signal for less restrictive crypto regulations.

Furthermore, the resignation of SEC Chair Gary Gensler, a figure often criticized for his strict stance on digital assets, has stirred further excitement within the crypto market.

These developments have fueled hope for a crypto-friendly regulatory environment in the coming years.