- The court’s decision is a precedent for future guidance on how to tax crypto rewards earned through staking
- The 8,876 Tezos tokens the coupled created shouldn’t have been taxed as income
- Couple will continue to pursue the case to obtain longer-term protection
A Nashville couple sued the Internal Revenue Service (IRS) over taxes they paid on Tezos staking rewards, which they neither claimed nor sold, and the IRS agreed to issue them a refund, CoinTelegraph reported.
Setting a judicial precedent
The court’s decision is widely seen as a precedent for future guidance on how to tax crypto rewards earned through staking. At the moment, Proof-of-Stake staking rewards are classified as earnings with tax due and payable. Now, it emerges they should be only taxed when they are sold for fiat.
Mr. and Mrs. Jarrett filed a complaint in May last year, stating that the 8,876 Tezos tokens they created in 2019 shouldn’t have been taxed as income because they weren’t. The complaint stated:
Taxing newly created cakes, books, or tokens as income would have far-reaching and detrimental effects on taxpayers and the U.S. economy, and is without support in the Internal Revenue Code, regulations, case law, or the Constitution.
The IRS declared it would refund the tax paid with “statutory interest as provided by the law”. The tax was around $3,800.
No guidance on taxing unclaimed staking rewards
At the moment, the IRS asks taxpayers whether they have “received, sold, exchanged, or otherwise disposed of any financial interest in any virtual currency” on their forms. However, none of those terms seem relevant to the couple’s case.
Ryan Losi, vice president of PIASCIK tax firm, likened the question to a trap. He told Yahoo in an interview:
The IRS is just gathering the data, changing the forms to expressly say you did or didn’t, and setting the trap, so in the coming years, the hammer can come down.
In some cases, crypto users don’t know how to provide an honest answer to the question according to Shehan Chandrasekera, Head of Tax Strategy at Coin Tracker. He shared with Cointelegraph that the instructions were not detailed enough:
For example, if your dependent owns cryptocurrency or you have an investment in a pass through entity that deals with cryptocurrency, we don't know if these two situations fall under the ‘financial interest’ category or not.
According to insiders cited by Forbes, the couple will continue to pursue the case to obtain longer-term protection. In the UK, regulators consider crypto staking tantamount to token sale and users have to pay profit tax. US crypto users hope never to be in this situation.