Jarretts Renew IRS Tax Battle Over Crypto Staking

Tezos stakers Josh and Jessica Jarrett file a complaint against IRS over how their tokens are taxed, disputing the agency’s treatment of their crypto earnings.

Josh and Jessica Jarrett’s prior lawsuit was dropped in 2022 when the IRS agreed to reimburse a portion of the taxes paid.

The Internal Revenue Service is the target of a new complaint from Tezos network stakers Josh Jarrett and his wife, Jessica Jarrett, regarding the way their tokens are treated tax-wise.

The Jarretts contend that their tokens generated through staking should be regarded as property and subject to taxes only when sold, not before, in a new lawsuit they filed on October 10 in a federal court in Tennessee.

As no one else has previously possessed tokens, staking them entails generating “new property,” which they compared to “a farmer’s crop, an author’s manuscript, or a manufacturer’s product,” where revenue isn’t generated until the token is sold.

“The earnings from the sale of that new property become taxable income rather than the new property itself. The IRS acknowledges that new property is not taxable income in any other situations, according to the Jarretts.

The IRS lists block rewards, such as staking, as “income” as soon as they are created, and tax is due on the tokens’ anticipated market value at that time, per the 2023 guidelines.

The Jarrets request a permanent injunction against the IRS recognizing their token creations as income, a declaration that prior federal income taxes were improperly assessed, and a return of $12,179 in taxes paid on 13,000 Tezos tokens received during the 2020 tax year.

The couple receives legal assistance from the Washington, DC-based think tank Coin Center.

In a statement released on October 9, Coin Center stated that it supports the assertion that tax rules and how government agencies interpret them have the “tremendous power to discourage Americans’ use of cryptocurrency and permissionless technologies.”

It continued, “We’ve supported legislative changes like the Virtual Currency Tax Fairness Act, which would create a de minimis exemption for small personal crypto transactions because some of that is unavoidable unless laws are changed.”

The Jarrets filed a lawsuit against the IRS in 2021, claiming that the agency had 8,876 Tezos tokens they obtained as prizes for staking in 2019.

They paid the IRS the $9,407 presumed tax obligation instead of exchanging or selling the tokens at that time.

Later, after their income decreased, they filed a lawsuit seeking a $3,293 refund and a $500 increase in tax credits.

After granting the Jarretts a $4,000 tax refund for income taxes paid on their Tezos staking winnings, the IRS successfully dismissed the case in a Tennessee District Court in 2022.

They declined to take the issue to court and establish a ruling that would apply to all proof-of-stake chains.

The IRS contended that the case was “moot,” giving the Jarretts a complete $4,000 refund and acknowledging they were not required to pay taxes on the 2019 staking prizes.

The Jarretts attempted but were unsuccessful in having the initial lawsuit reopened on appeal before this most recent case.