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Crypto Staking Classified As Taxable By IRS Amid Legal Dispute

Ash Tiwari
by Ash Tiwari
8 months ago
·
Posted in Crypto regulation
Trusted Editorial content, reviewed by leading industry experts and seasoned editors. Ad Disclosure

The US tax regulator, the Internal Revenue Service (IRS), has restated its stance on cryptocurrency staking, clarifying that rewards generated from staking activities are taxable as soon as they are received. The IRS added that staking rewards do not constitute new property, and are therefore subject to immediate taxation upon generation.

IRS Confirms Crypto Staking Taxable On Receipt

According to a recent Bloomberg report, the IRS reiterated its position that digital asset staking rewards should be taxed as income as soon as they are generated and made available to the recipient. This outcome of the case is expected to have wide-ranging implications for the treatment of staking rewards under US tax laws.

Related Reading: How Crypto Losses Can be Used to Offset Your 2024 Tax Bill

The regulator further clarified that staking does not result in the creation of new property, refuting comparisons to farming, manufacturing, or creative works. The IRS’ decision dismisses the argument that staking-generated cryptocurrency should only be taxed upon sale or exchange.

The IRS’ stance is regarding an ongoing legal dispute involving Tennessee residents, Joshua Jarrett and Jessica Jarrett. The couple – who staked cryptocurrency on the Tezos (XTZ) network – argued that their staking rewards should not be taxable until they are sold or exchanged for other assets. They contended that their rewards represented “new property,” akin to crops harvested by a farmer or a book written by an author.

However, the IRS countered that all rewards generated through staking activities constitute taxable income upon receipt. In its official statement, the agency remarked:

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.

For the uninitiated, crypto staking is the process of locking up cryptocurrency in a blockchain network to help validate transactions and secure the network, earning rewards in return. It typically involves proof-of-stake (PoS) or similar consensus mechanisms, allowing participants to earn passive income on their holdings.

The IRS’ 2023 guidance specifies that block rewards, including those earned through staking, are to be treated as income at the time they are generated. The tax liability for these rewards is based on their fair market value at the time of receipt, making it crucial for taxpayers to track the value of tokens as they are earned.

Background On The Tax Dispute

The Jarretts’ legal battle with the IRS began in 2021, when they filed a lawsuit over the taxation of 8,876 XTZ tokens earned as staking rewards in 2019. They argued that these rewards constituted “new property” and should not be taxed until sold or exchanged. 

Drawing comparisons to farming or manufacturing, the couple asserted that staking rewards should be treated like a farmer’s crops, a manufactured good, or an author’s manuscript – taxable only upon monetization.

Related Reading: Bitcoin As Federal Tax Payment Method? Congressman Presents New Legislation

In response, the IRS offered the couple a $4,000 tax refund, which they declined in hopes of setting a legal precedent for all proof-of-stake blockchain networks. However, the court eventually dismissed the case, ruling it moot due to the refund.

In October 2024, the Jarretts filed a second lawsuit, seeking a tax refund of $12,179 for taxes paid in 2020 on approximately 13,000 XTZ tokens earned through staking. They also sought a permanent injunction against the IRS’ current tax treatment of staking rewards. This case is ongoing and may have broader implications for how crypto staking rewards are taxed in the US.

To say that the IRS is hounding crypto investors would be disingenuous, as the regulator has taken several measures to make it easier for taxpayers to file their crypto taxes. That said, legal forces in the US are indeed going after individuals suspected of engaging in malicious activities, including crypto tax evasion.

In related news, an individual was recently sentenced to two years in prison for failure to report capital gains from crypto sales between 2017 and 2019. At press time, Bitcoin trades at $97,471, up 4.2% in the past 24 hours.

bitcoin
BTC trades at $97,471 on the daily chart | Source: BTCUSDT on TradingView.com
Featured Image from Unsplash.com, Chart from TradingView.com
Editorial Process for bitcoinist is centered on delivering thoroughly researched, accurate, and unbiased content. We uphold strict sourcing standards, and each page undergoes diligent review by our team of top technology experts and seasoned editors. This process ensures the integrity, relevance, and value of our content for our readers.
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Ash Tiwari

Ash Tiwari

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Ash is a seasoned freelance editor and writer with extensive experience in the blockchain and cryptocurrency industry. Over the course of his career, he has contributed to major publications, playing a key role in shaping informative, timely content related to decentralized finance (DeFi), cryptocurrency trends, and blockchain innovation. His ability to break down complex topics has allowed both seasoned professionals and newcomers to the industry to benefit from his work. Beyond these specific roles, Ash's writing expertise spans a wide array of content, including news updates, long-form analysis, and thought leadership pieces. He has helped multiple platforms maintain high editorial standards, ensuring that articles not only inform but also engage readers through clarity and in-depth research. His work reflects a deep understanding of the rapidly evolving blockchain ecosystem, making him a valuable contributor in a field where staying current is essential. In addition to his writing work, Ash has developed a strong skill set in managing content teams. He has led diverse groups of writers and researchers, overseeing the editorial process from topic selection, approval, editing, to final publication. His leadership ensured that content production was timely, accurate, and aligned with the strategic goals of the platforms he worked with. This has not only strengthened his expertise in content strategy but also honed his project management and team coordination skills. Ash's ability to combine technical expertise with editorial oversight is further bolstered by his knowledge of blockchain analysis tools such as Etherscan, Dune Analytics, and Santiment. These tools have provided him with the data necessary to create well-researched, insightful articles that offer deeper market perspectives. Whether it’s tracking the movement of digital assets or analyzing blockchain transactions, his analytical approach adds value to the content he produces, ensuring readers receive accurate and actionable information. In the realm of content creation, Ash is not limited to just cryptocurrency markets. He has demonstrated versatility in covering other emerging technologies, market trends, and digital transformation across various industries. His in-depth research, coupled with a sharp editorial eye, has made him a sought-after professional in the freelance writing community. From developing editorial calendars to managing content delivery schedules, he has honed a meticulous approach to project management that ensures timely, high-quality work delivery. Throughout his freelance career, Ash has consistently focused on improving audience engagement through well-researched, insightful, and relevant content. His ability to adapt to the evolving needs of clients, whether it's enhancing the visibility of digital platforms or producing thought-provoking pieces for a wide range of audiences, sets him apart as a dynamic force in the field of digital content creation. His contributions have helped to shape a well-rounded portfolio that showcases his versatility, technical expertise, and dedication to elevating the standards of journalism in blockchain and related sectors.

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