The IRS may not tax staking prizes until they are sold, according to a recent court decision.
The Internal Revenue Service (IRS) has agreed to offer a refund to a Nashville couple who sued the organization over taxes they paid on unclaimed and unsold Tezos staking rewards.
The judgment might set a precedent for how bitcoin rewards earned through staking are taxed in the future. Proof-of-Stake staking payouts are currently classified as income and are subject to taxation at the time of gaining.
According to the latest development, taxes should only be imposed when they are sold for USD. As TheCoinRise reported, from this season, investors need to report their crypto investments to the IRS.
In May 2021, the Jarretts filed a lawsuit against the U.S. government, claiming that the 8,876 Tezos (XTZ) tokens they developed in 2019 were not income and should not be taxed. The government was also seeking to do something “unprecedented,” according to the complaint, by taxing creative activity instead of income.
“Taxing newly created cakes, books, or tokens as income would have far-reaching and detrimental effects on taxpayers and the U.S. economy, and is without support in the Internal Revenue Code, regulations, case law, or the Constitution.”
IRS has no clear guidelines on staking rewards taxation
As per the court files set to be publicly disclosed on Thursday, the IRS said it would accept the Jarretts’ request to repay the $3,793 they paid for unclaimed rewards last year, with “statutory interest as provided by the law.”
There are currently no guidelines on how to tax unclaimed staking rewards. The IRS asks taxpayers if they’ve “received, sold, exchanged, or otherwise disposed of any financial interest in any virtual currency,” but none of those terms appear to apply to the Jarretts’ unclaimed and resold prizes.
According to Forbes, people close to the case indicate the couple intends to take the issue to court again in order to secure longer-term protection and set a national precedent. Taxpayers in the United States are certainly hoping that no legislative response to the court’s decision mirrors the U.K. regulator’s recent crypto staking instructions. Staking cryptocurrency will often be treated as a sale of tokens, generating capital gains tax.