IRS Reaffirms Staking Rewards Are Taxable, Says They Are Not New Property

The US Internal Revenue Service (IRS) has reiterated its stance that staking rewards are taxable income upon receipt, rejecting claims that they should be treated as new property and taxed only upon sale.

The clarification comes amidst a legal challenge from Joshua and Jessica Jarrett, who argue that staking rewards should not be taxed until they are sold or exchanged.

According to a Bloomberg report on 23 December 2024, the IRS denied the Jarretts’ assertions. The IRS claims that staking rewards must be reported as income based on their fair market value at the time the taxpayer gains the ability to sell or otherwise dispose of them.

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IRS Cites Revenue Ruling 2023-14

The agency cited Revenue Ruling 2023-14 as the foundation for its position. “Revenue Ruling 2023-14 requires taxpayers who receive staking rewards to report the rewards as income at their fair market value,” the IRS said.

Staking involves locking up cryptocurrency in a smart contract to secure blockchain networks and validate transactions. In return, participants earn rewards, typically in the form of additional cryptocurrency.

The IRS classifies these rewards as taxable income from the moment they are received, with tax liability determined by their market value at that time.

The Jarretts’ legal battle with the IRS began in 2021 when they contested the tax treatment of 8,876 Tezos (XTZ) tokens earned as staking rewards in 2019. They likened staking rewards to property, such as crops or manuscripts, arguing that taxation should occur only upon sale.

Although the IRS initially offered a $4,000 tax refund, the couple declined, seeking to establish a legal precedent for all proof-of-stake networks.

JUST IN: 🇺🇸 IRS States Crypto Staking Is A Taxable Event! pic.twitter.com/KxSH16Nzz7

— Good Morning Crypto (@AbsGMCrypto) December 23, 2024

After their first case was dismissed as moot, the Jarretts filed a second lawsuit in October 2024. In this latest case, they requested a $12,179 tax refund for taxes paid on 13,000 XTZ tokens earned in 2020.

They also sought a permanent injunction against the IRS’s current tax treatment of staking rewards, asserting that newly created property is not taxable income until sold.

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Governments Seek To Impose Stricter Tax Regulations On Crypto

IRS’ move follows a global trend of governments seeking to impose stricter tax regulations on both crypto and traditional financial assets. For example, Italy’s Vice Economy Minister, Maurizio Leo, has announced plans to increase the capital gains tax on digital assets to 42%.

Furthermore, UK Chancellor Rachel Reeves is considering raising capital gains taxes, including those on digital assets, from 20% to 39%. The move is a far cry from the Government’s 2022 report announcing that stablecoins were to be recognized as a valid form of payment.

Denmark’s Tax Law Council has also recommended a bill that could introduce taxation on unrealized gains and losses on crypto assets for Danish investors, potentially starting in 2026.

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Disclaimer

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