Income tax

Reward staking: is the IRS digging in or changing its mind? – Income tax

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Crypto industry groups had hoped to use the tax refund case of
Jarrett v. United States, No. 3:21-cv-00419 (MD Tenn.) as a means of proving that staking rewards received by a crypto validator only trigger a gain upon final disposition of the reward, rather than being taxable income at the reception. However, as previously reported here, the IRS apparently decided it was not ready to fight this battle and sought to challenge the taxpayer’s lawsuit by refunding (without explanation) the amount of tax the taxpayer claimed to have. (over)paid on his staking rewards. . The taxpayer, and a cryptocurrency policy group as an amicus, claimed the case should proceed despite the refund since the IRS should not be able to avoid ongoing litigation by offering a preemptive “settlement” and because the tax treatment of staking rewards was a recurring issue for the Jarretts as well as a matter of “public importance” that warranted an exception to the mootness of the case. On September 30, 2022, the court agreed with the IRS that it no longer had jurisdiction in the matter and dismissed the case. Jarrett v. United Statesno. 3:21-cv-00419, 2022 WL 4793235 (September 30, 2022).

Essentially, the court relied on the nature of a refund claim as being limited to the specific tax year at issue. Since the IRS had refunded the full amount that the taxpayer overclaimed, there was no further controversy for the court to resolve regarding the taxpayer’s liability for the year in question, and a refund request would not may not be used to argue forward-looking matters applicable to other years. . The court also rejected the taxpayer’s characterization of the refund as merely an offer to settle and was not persuaded that the “public importance” of the issue warranted pursuing a controversial case.

After the dismissal in hock, the appropriate taxation of staking rewards remains unclear. Perhaps the IRS is reconsidering its position that staking rewards are income upon receipt. But the IRS’ adamant refusal to explain its rationale for issuing the refund to the Jarretts indicates that the refund may simply reflect a strategic decision to take the battle over the tax treatment of staking rewards to more favorable ground at a future date. . Either way, the IRS has given itself some more time to refine its thinking on staking rewards and has left the crypto industry frustrated and disappointed with the lack of a clear resolution on the matter. staking.

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