tl;dr
Josh Jarrett has filed a lawsuit against the US IRS over its tax policy on crypto staking rewards, arguing they should only be taxed upon sale, not receipt. The lawsuit seeks to reclassify staking rewards as property, not income, mirroring the tax treatment of crops and minerals. This is Jarrett's s...
US IRS Faces New Lawsuit Over Crypto Staking Tax Policy
Josh Jarrett challenges US IRS's tax policy on crypto staking rewards, arguing they should be taxed only upon sale, not receipt. The lawsuit seeks to reclassify staking rewards as property, not income, mirroring the tax treatment of crops and minerals. This is Jarrett's second attempt to challenge the IRS's taxation of staking rewards. The lawsuit aims to make the IRS change its policy before legislative processes to make it more reasonable. Additionally, from 2025, the IRS will impose new information reporting obligations on crypto brokers and providers of wallets.
The US Internal Revenue Service (IRS) is again under legal pressure in relation to taxation of cryptocurrency staking rewards. On October 10, 2024, Josh Jarrett filed a new lawsuit with support of Coin Center and against the agency’s approach of taxing block rewards as income at the time of receipt.
In a filing on Thursday, the IRS is in the spotlight over its position on block rewards, which are newly minted tokens of a cryptocurrency given to validators who add blocks to a blockchain. The agency currently considers these rewards taxable income at the moment they are received, a policy that Jarrett and Coin Center argue is unjust.
The lawsuit alleges that taxing staking rewards before they are sold leads to overtaxation and places additional and unnecessary regulatory burdens on cryptocurrency node operators.
This lawsuit is Jarrett’s second shot at trying to sue the IRS for its position on the taxation of staking rewards. He filed another similar case in 2021 when the IRS failed to explain how staking rewards are taxed.
Concerns have been raised that this treatment is anti-competitive and hinders the deployment of the decentralized networks and innovation. In the networks where a large number of users are engaged in staking, the revenue from staking is split among many stakeholders, thus it is less reasonable to tax the entire value of the newly created tokens as an income.
In the first half of 2024, a bill that was proposed before the House of Representatives stated that taxes on staking rewards would only be applied when the tokens are sold.
The lawsuit will seek to make the US IRS change its policy before the legislative process to make it more reasonable. Moreover, from 2025, the Internal Revenue Service will impose new information reporting obligations on crypto brokers, including exchanges, and other providers of wallets to report customer transactions and gains.
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