Tax Case Promising for Crypto Industry
Staking Rewards Deemed Not Taxable, Sort of
Joshua Jarrett was offered a $3,793 refund by the IRS for his 2019 tax return.
He turned it down.
What happened
Jarrett, in 2019, participated in staking operations on the Tezos blockchain by staking his coins to contribute towards new blocks of Tezos. For his contribution, Jarrett was rewarded with 8,876 new coins, which had a market value of $9,407 at the time. In accordance with IRS regulations, Jarrett reported “Other Income” on his 2019 income tax return of $9,407.
Several months later, Jarrett filed an amended return, asserting that the $9,407 staking rewards was not income, since he hadn’t sold the coins yet. He has a point. Federal tax laws state that newly created property is not income until it “is an ascension to wealth that is clearly realized.” Think about that wording. If you have an unrealized gain with a stock because you haven’t sold it yet, you clearly don’t have to report the income.
The IRS Positions are Inconsistent
The US government treats cryptocurrency coins as “property.” As such, they are an asset upon which gains are not taxed until sold. Just like stocks, bonds, or a piece of inventory. Think, building pieces of furniture. Mining or staking for crypto coins is no different. You are building or creating property.
By taxing crypto mining and staking rewards immediately upon their creation, they have not followed the proper treatment of the taxation of property. Rather, they have actually taxed, in this case, the Tezos rewards as if a currency was received. Trying to have it both ways? Yes, absolutely.
What happened to Joshua Jarrett next
More than a year after filing his amended 2019 return, Jarrett filed a complaint with the Tennessee District Court seeking his claimed refund. Just this past week, on February 3, the US Department of Justice’s Tax Division informed Jarrett that his refund had been approved. No formal judgement was issued, and the taxpayer was given no assurance that rewards from staking or mining would be taxable in the future or not. Kind of a strange way to resolve a case.
Jarrett informed the Court that he was refusing the refund, which amounted to $3,793. He is still pushing for a formal response from the Court or from the IRS.
Speculation as to what this means
Was the court simply trying to resolve an issue that had been open for two years, trying to improve its performance? It clearly did not look like they were trying to establish a precedent. Were they waiting for another similar case, with facts more favorable to the government, on which to establish a precedent?
Media reports that the IRS has reversed course on its previous position regarding mining and staking don’t seem to be accurate, just hopeful.
In July 2020, a bipartisan group of members of Congress sent a letter to the IRS asking that all proof of stake rewards be taxed when sold rather than constituting taxable income upon receipt. They have not heard back. Stay tuned.
This Month in Bitcoin History
February 2014: Mt. Gox, one of the largest Bitcoin exchanges, suspended withdrawals from the exchange. Later in the month, Mt. Gox had filed for bankruptcy amid reports that 744,000 Bitcoins had been stolen. Some of the coins were recovered and, going up in value in the ensuing years, many of the creditors’ claims were paid.
February 2021: Bitcoin’s price surged to over $44,000 as Elon Musk and Tesla announced they had invested in Bitcoin, and would soon be accepting Bitcoin as payment for their cars.
Tweet of the Week:
Issue No. 43, February 11, 2022
Rick Mulvey is a CPA, forensic accountant and crypto consultant. He writes about all things Bitcoin, and yells at the Yankees and Giants. He also runs marathons and makes wine, neither professionally.
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