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Staking - Couple Wins Lawsuit With US IRS

 


The Jarretts have objected to the IRS interpreting their staking rewards as taxable income.


A couple from the American city of Nashville have won a lawsuit with the US tax authority IRS, which is not only a happy occasion for the spouses, but could also set a precedent for crypto investors in the US.


The legal dispute, which involves the tax assessment of unsold staking rewards from the crypto project Tezos, could prove to be an important guideline for similar cases in the future. So far, in the USA, it has actually been the case that rewards from staking cryptocurrencies as part of Proof-of-Stake (PoS) consensus processes are taxable as income. Accordingly, the rewards had to be taxed as soon as they were distributed. However, according to the case law, tax does not have to be paid until the rewards are sold and generate a US dollar return.


The Jarretts originally filed a lawsuit against the state in May 2021, arguing that the 8,876 Tezos ( XTZ ) they created through staking in 2019 do not represent any form of income and should therefore not be taxed as such. Following that line, the couple went on to argue that the US government was actually crossing the line by "taxing a value-added process, not the income derived from it."


“If newly created goods like cakes, books or tokens are taxed as income, it would have far-reaching, negative consequences for all American taxpayers and the American economy as a whole. In general, there would be no legal basis for this under current tax law.”

According to the court documents, the US Internal Revenue Service has now agreed to give in to the Jarretts' demand and return the tax money plus interest. The couple gets a refund of at least 3,793 US dollars.


Nevertheless, the legal situation regarding the taxation of staking rewards initially remains unclear, because the IRS only asks taxpayers in their declaration forms whether they "received, sold, traded or otherwise disposed of" virtual currencies in the relevant period. Since none of these descriptions apply to the rewards generated by staking that have not yet been sold profitably, there is still uncertainty for crypto investors.


As Forbes reports, the couple probably wants to take the process to the next higher instance in order to have long-term legal certainty in the matter and to create a nationwide precedent. American crypto investors will probably keep their fingers crossed that the result will not be crypto regulation like in the UK, because in the UK staking is already interpreted as an act of sale, which automatically means capital gains tax applies.

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