Jarrett Case Still Provides No Clarity on Taxation of Cryptocurrency Staking

The lawsuit brought on in the Jarrett case was dismissed by the U.S. Court for the Middle District of Tennessee on September 30, 2022. The court sided with the government, stating that the case for further action was moot, as the government had already approved a refund of tax.

If you are unfamiliar with the case, Joshua and Jessica Jarrett initiated a suit, claiming that their Tezos rewards, earned via staking, were not taxable at the time of receipt, but rather when they were sold as “newly created property”. The IRS failed to give an opinion on the matter and refunded the excess tax paid. However, the Jarretts refused the refund and sued the IRS, as they were hoping to set a judicial precedent. The court saw no reason to move forward with this claim, and dismissed the suit. Although the Jarretts were issued a refund, the IRS did not have to provide any clarity, or issue any guidance, as to the proper treatment of staking rewards.

The lack of guidance surrounding staking rewards has led to a wide range of positions by taxpayers. Most argue that staking rewards are taxable at the time of receipt, similar to the treatment of mining activities (The IRS has issued guidance on this). Some argue that the rewards are not taxable until sold, comparing them to the extraction of actual minerals (such as oil and gas). While others assert that staking income is not taxable because it does not meet the definition of income or does not represent a “clearly realized ascension to wealth.”

There may be many ways to look at this issue, but it is clear that staking rewards are taxable. It doesn't seem as if the treatment of oil and gas extracts would apply to staking rewards. There are certain tax guidelines that were created specifically for these industries, and would not be applicable to other sources of income. Taking the stance that rewards are not taxable at all is also quite bold. In most cases, there is a clear assigned value of the newly created coins and disregarding tax altogether, with or without disclosure, does not seem like a prudent thing to do.

I would recommend treating rewards the same as hard forks and airdrops. It should be reported in the year of receipt at the fair market price (on the day the reward was received) as ordinary income. There is IRS guidance for both of these events and although it does not specifically mention staking rewards, it’s the best interpretation of the available guidance.

If you then choose to hold those rewards, they will then be subject to capital gains rates upon sale. If the IRS issues guidance in the future that contradicts this way of reporting, the return can be amended. But, based on the interpretation of current guidance, this seems to be the correct approach.