A couple sued the federal tax agency in the United States over Tezos, (XTZ), staking rewards taxesation. They chose to give up a tactical win and enter into a legal battle that could ultimately lead to policy change.
Joshua and Jessica Jarrett are Tezos network nodes that “bake” new blocks. In other words, they sue the Internal Revenue Service (IRS), over taxes on XTZ tokens. The Jarretts filed an IRS refund claim for up to $3,000 that they paid on the tokens.
The lawsuit’s core issue is how staking rewards are classified as either taxable income, or created property. It is not subject to tax until the item is sold. Tezos bakers claim that earning coins through staking is similar to writing a book or baking a cake, and therefore these coins should not count as taxable income.
Related: Crypto staking and the unfair taxation of the US
Joshua Jarrett issued a statement on February 3 stating that the U.S. Government had offered a partial refund of the tax in question. Jarett stated that it seemed like great news at first, but that he soon realized that the IRS could tax his staked rewards again without a court ruling. Jarrett said:
After a year and half, the government decided not to defend my position that the tokens I had created by staking were taxable. […] I want a better answer. I turned down the government’s offer of a refund.
Jarrett’s statement also indicates that Jarrett is aiming to get the IRS clarifying its position on taxing stake and block rewards for “both Proof of Stake” and Proof of Work systems. Jarrett maintained that although there is no guidance on the matter, the concession made by the tax authority in his case could be taken to support the view that staking reward are not taxable income.
Reid Yager, a former staffer at the industry advocacy group Proof of Stake Alliance(POSA), stated:
American innovation and American business are at risk due to the IRS’s and DOJ’s decision to issue a refund, without correcting poor policy.
The PoS industry will be impacted by the outcome of the court decision on whether or not staking rewards can be considered taxable income.