February 23, 2022

On Feb. 2, the IRS conceded a lawsuit filed by Joshua and Jessica Jarrett concerning the taxability of staking rewards for cryptocurrencies. This decision was initially greeted as a victory by the crypto-community, but it appears closer to a stalemate now that the dust has settled.

The case began in 2019 when the Jarretts paid close to $3,200 in income tax on new tokens they created through staking. Believing that their tokens should only be taxed when they are sold, the Jarretts filed for a refund of the $3,200 in August 2020. The IRS originally ignored the claim, resulting in the couple taking the matter to a federal court. Now, the IRS has offered to process the refund request.

While many in the crypto-community were quick to celebrate the IRS’ concession, a closer look finds many answers are still up in the air regarding staking rewards and cryptocurrencies. There has been no official court ruling on the lawsuit, and the IRS never backed away from their initial position. Instead, the tax-collecting agency simply decided it was not worth their time or resources to pursue a refund of that size.

This means the issue of taxing staking rewards is liable to return in the future, and investors on the wrong side of the ruling will be forced to pay up. While the IRS didn’t offer any follow-up guidance on staking rewards, the existing law is broad enough to include unsold staking rewards under their definition of “income.”

Despite being offered their money back from the IRS, the Jarrets have refused the refund and are pushing forward with their case.

If you have questions about staking rewards or the tax responsibilities of your cryptocurrency investments, send me an email.

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