Staking Rewards May Not Be Taxed Until Sold, According To The IRS

The Internal Revenue Service (IRS) has agreed to offer a refund to a Nashville couple who sued the IRS over taxes they paid on unclaimed and resold Tezos staking rewards.

The ruling might establish a precedent for future guidance on how to tax cryptocurrency earnings generated via staking. At the moment, Proof-of-Stake (PoS) staking incentives are regarded as income and must be taxed as soon as they are obtained. According to the latest developments, they should only be taxed when sold for USD.

Context and details

In May 2021, the Jarretts filed a complaint against the U.S government, claiming that the 8,876 Tezos (XTZ) tokens they produced in 2019 were not income and shouldn&39t have been taxed as such. The case also alleged that the government was doing something unique, namely tax creative activity rather than revenue.

"Taxing freshly made cakes, books, or tokens as income would therefore have far-reaching and damaging impacts on taxpayers and the United States economy," the couple argued. They further stated that this is not supported by the Internal Revenue Code, regulations, caselaw, or even the constitution itself. The IRS responded by declaring that it will honour the Jarretts request to repay the $3,793 they paid for their unclaimed rewards plus "statutory interest as required by law".

What&rsquos next?

Even today, there is currently no clear information or guidelines pertaining to taxing unclaimed staking rewards. The IRS asks taxpayers if they have "received, sold, traded, or otherwise disposed of any financial interest regarding digital currencies", but none of those characteristics appear to apply directly to the Jarretts unclaimed and resold awards.

Moreover, the couple reportedly intends to push the issue further in court in order to get longer-term protection and create a national precedent. American taxpayers are probably hoping that no legislative reaction to this court decision mirrors the United Kingdom regulators recent cryptocurrency staking instructions. There, crypto staking is frequently treated as a token sale, resulting in capital gains tax. Only time will tell what shall happen within the U.S as staking has become an exceedingly popular common method of earning crypto and extra income.