Nashville Couple Sues IRS Over Tezos Staking Rewards Tax

A couple in Nashville, Tenn., has filed a lawsuit against the U.S. Internal Revenue Service (IRS) over tax they paid on rewards for staking on the Tezos blockchain.

Joshua and Jessica Jarrett are requesting a refund of income tax paid in 2019 totaling $3,293 for the receipt of 8,876 tezos tokens, according to a legal complaint shared by a spokesperson for the Proof of Stake Alliance (POSA), an advocacy group aiming to bring legal and regulatory clarity to PoS technology. The Jarretts are also seeking a $500 increase in tax credits for lost income.

This is the first major suit filed against the IRS related to crypto staking rewards, the spokesperson told CoinDesk Wednesday.

The case has potentially far-reaching implications for how contributors to proof-of-stake (PoS) blockchains are taxed for the tokens they receive. The outcome could resonate with users of the much larger Ethereum blockchain once it switches to a PoS mechanism, expected later this year.

The Jarretts say they should not have been taxed on the tezos tokens until they were sold or exchanged. Federal income tax laws do not permit the taxation of tokens created through a staking enterprise, according to the document.

"Like a baker who bakes a cake using ingredients and an oven, or a writer who writes a book using Microsoft Word and a computer, Mr. Jarrett created a property," the document says. (In the Tezos system, the equivalent of Bitcoin's miners are known as "bakers.")

Just as pastry makers and writers are not taxed on the property they create, but on the income from sales, "Mr. Jarrett will realize taxable income when he first sells or exchanges the new property he created," the complaint reads.

"This is an issue of practical and economic importance," POSA founder Evan Weiss said. "The wrong policy would drive innovation elsewhere ... Fortunately, the correct policy is set under existing laws."

The IRS has yet to issue specific guidance on the taxation of crypto assets where staking is involved. Four lawmakers wrote to the agency in July 2020 asking for assurance that stakers would not face tax liabilities for receiving block rewards until those rewards are sold.

CORRECTION (May 26, 16:50 UTC): An earlier version of this article gave the wrong first name for Ms. Jarrett. It is Jessica, not Jackie.