U.S. Crypto Investors Reject IRS Settlement

Plaintiffs Joshua and Jessica Jarrett and the Proof of Stake Alliance want to compel the IRS to argue its case in court.

Shutterstock image by Zolnierek

Key Takeaways

  • A married couple in Tennessee have claimed that the U.S. government offered them a tax refund after improperly taxing their crypto staking rewards—but they are refusing it.
  • In 2019, Joshua and Jessica Jarrett sued the Internal Revenue Service for taxing them on unsold crypto rewards earned by staking on the Tezos blockchain.
  • The Jarretts' case draws attention to certain inconsistencies in the IRS's policies and seeks to force clarity on the matter.

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Joshua and Jessica Jarrett, a married couple in Tennessee and plaintiffs in a suit against the Internal Revenue Service, have said that they are rejecting a settlement offer from the government body; instead, they and their legal sponsors want to make the IRS defend its position in court.

Taxpayers Want IRS To Clarify Crypto Policy

A pair of Tennessee taxpayers have rejected a settlement offer from the IRS and are instead insisting upon regulatory clarity.

In 2019, Joshua and Jessica Jarrett were taxed on 8,876 Tezos tokens they received by staking on Tezos blockchain. These tokens were taxed as ordinary income, though the Jarretts contend those tokens should only have been taxed upon their sale. In 2020, the Jarretts sued the IRS for damages.

Their case was supported by the Proof of Stake Alliance.

Received property is treated as income for tax purposes in the United States; however, the Jarretts and POSA have argued that tokens awarded to the Jarretts were not technically “received” property at all, but instead “new” property.

Writing in the complaint that “no express provision of 26 U.S.C. §61 or any regulation thereunder treats as gross income an item of property created by a person,” the plaintiffs’ team goes on to argue that “new property—property not received as payment or compensation from another person but created by the taxpayer—is not and has never been income under U.S. federal tax law.”

In other words, the suit argues that the Jarrett’s “created” property by staking their Tezos tokens, and that therefore this property should not be taxable until it is sold, for it is only at the point of sale that the taxpayer realizes any gains.

Waving the White Flag

In December 2021, the IRS appeared to concede and offered the Jarretts a refund of $3,793, plus interest. However, they opted to reject it with the hope of receiving a “better answer” from the IRS regarding the agency’s official policy on mining and staking rewards.

Joshua Jarrett wrote in an official statement he shared on Twitter:

“At first glance, this seemed like great news. But until the case receives an official ruling from a court, there will be nothing to prevent the IRS from challenging me again on this issue. I need a better answer. So I refused the government’s offer to pay me a refund.”

The Jarretts’ refusal of the settlement would appear to be an effort to compel the IRS to clarify its policy of taxing staking rewards as income in front of a U.S. court. POSA believes the court case will help remove the confusion over the taxation of staking rewards.

“For the sake of fair tax administration and American innovation, I hope the IRS follows this up quickly with clear guidance that staking rewards aren’t taxable income,” Alison Mangiero, Board Member and acting Executive Director of POSA, said in a statement.

A bench trial is slated to start in March 2023, according to a court document. The outcome from the lawsuit may have far-reaching implications for crypto tax policy in the U.S.

Disclosure: At the time of writing, the author of this piece did not hold any of the aforementioned cryptocurrencies.

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