The IRS has clarified that cryptocurrency staking rewards are taxable as income when they are received. This clarification comes in response to a legal dispute involving Joshua and Jessica Jarrett, who challenged the IRS's position on the matter.
The IRS's recent guidance states that staking rewards do not create new property and should be taxed at their fair market value when they are made available to the recipient. This ruling, known as Revenue Ruling 2023-14, has significant implications for the treatment of staking rewards under U.S. tax law. The IRS's position dismisses the argument that staking rewards should only be taxed when they are sold or exchanged.
The Jarretts filed a lawsuit against the IRS in 2021, claiming that their staking rewards should not be subject to taxation until they were sold or exchanged. The IRS offered them a tax refund, which they declined, and the court ultimately dismissed their case. In 2024, the Jarretts filed a second lawsuit seeking a tax refund for taxes paid on staking rewards earned in 2020. This ongoing case could have broader implications for the taxation of crypto staking rewards in the United States.
The IRS's clarification on the taxation of staking rewards is expected to have far-reaching consequences for crypto investors. It highlights the importance of accurately tracking the fair market value of tokens as they are earned, as the tax liability is based on this value at the time of receipt. The IRS's actions reflect its efforts to regulate the cryptocurrency space and ensure compliance among investors. The agency has implemented measures to simplify the tax filing process for cryptocurrency investors, but it has also increased enforcement efforts against individuals suspected of tax evasion related to cryptocurrency activities.
The outcomes of the legal battles surrounding staking rewards may set important precedents for how cryptocurrencies are treated under U.S. tax law.