In a significant development for cryptocurrency investors, the Internal Revenue Service (IRS) has officially declared that rewards earned from crypto staking are subject to taxation. This announcement comes in the wake of an ongoing lawsuit filed by Joshua Jarrett, a cryptocurrency investor who is contesting the IRS’s stance on the tax classification of staking rewards.
The IRS’s clarification, reported recently by Bloomberg, asserts that staking rewards should be taxed as income at the moment they are received. This position contradicts Jarrett’s argument that these rewards should be considered newly created property and thus not taxable until sold. The legal dispute, initiated in October 2024, could have far-reaching implications for how crypto staking is regulated and taxed in the United States.
Taxation of Staking Rewards Explained
According to the IRS, individuals who stake cryptocurrencies gain both “dominion and control” over the rewards they earn, which qualifies these rewards as taxable income under current tax laws. The agency references Revenue Ruling 2023-14, which mandates that taxpayers must report the fair market value of their staking rewards as gross income in the year they gain access to them.
The process of staking involves locking up existing cryptocurrency assets to support network operations such as transaction verification. In return, participants receive additional tokens as rewards. The IRS maintains that these tokens represent immediate taxable income rather than new property.
Legal Background and Implications
Jarrett’s lawsuit is not his first encounter with the IRS over this issue. He previously filed a complaint regarding taxes on Tezos tokens earned through staking in 2019. Although he was granted a refund for overpaid taxes, he declined to accept it, seeking instead a definitive ruling on the broader implications of staking taxation.
His current legal challenge aims to overturn the IRS’s ruling on staking rewards, arguing that they should only be taxed upon actual sale or transfer. Jarrett draws parallels between staking rewards and other forms of newly created property—like crops or manuscripts—that are not taxed until sold.
The outcome of this case could reshape U.S. tax policy regarding cryptocurrency staking and influence how similar cases are handled in the future. As the cryptocurrency market continues to grow, with Bitcoin recently surpassing $100,000 for the first time, regulatory scrutiny is intensifying.
This legal battle highlights ongoing debates within the crypto community about taxation and regulation as stakeholders navigate an evolving landscape marked by rapid innovation and increasing governmental oversight. The resolution of Jarrett’s lawsuit will be closely watched by both investors and regulators alike, potentially setting a precedent for how staking activities are treated under U.S. tax law.
