Imagine you’re building something from scratch, like a new farm, writing a book, or assembling a product. You wouldn’t pay taxes on these things until you actually sell them, right? Well, this is what’s happening with Josh and Jessica Jarrett, a couple who “created” new cryptocurrency tokens by participating in a process called staking, but the IRS is treating these tokens differently and wants them taxed before they are even sold.
What’s the Big Deal?
Josh and Jessica Jarrett are suing the IRS—again—because they believe that cryptocurrency tokens they create through staking should be treated like any other kind of property: only taxable when sold. But the IRS thinks differently. The IRS says that the moment these tokens are created, they count as income, and you should pay taxes on them based on their market value at that moment.
This might seem like a small issue, but it’s actually part of a bigger conversation about how cryptocurrency is taxed in the U.S. and could affect anyone involved in staking, a method used to help secure certain blockchain networks like Tezos. Understanding this case is important because it could shape how staking and block rewards (the rewards you get for helping secure a blockchain) are taxed in the future.
Key Points to Remember:
- Staking: In simple terms, staking is when people lock up their cryptocurrency to help keep the blockchain secure, and in return, they earn new tokens.
- Block rewards: These are the new tokens created as a reward for staking.
- IRS’s stance: The IRS believes that as soon as the Jarretts earn these new tokens (block rewards), it counts as income, and taxes should be paid immediately, based on their value at the time of creation.
- Jarretts’ stance: They argue that their staked tokens are like new property, similar to crops or a written manuscript, which should only be taxed when sold, not when created.
Why Does This Matter?
This isn’t just a personal fight between the Jarretts and the IRS. It’s about how tax laws apply to the growing world of cryptocurrency, especially the concept of staking. If the IRS wins, anyone who stakes cryptocurrency could face heavy tax bills even if they haven’t sold their tokens. It would make cryptocurrency staking a lot riskier and less attractive to investors.
But if the Jarretts win, it could create a legal precedent, protecting other cryptocurrency users from having to pay taxes on tokens they haven’t sold yet. This would make staking more appealing and potentially boost the adoption of cryptocurrencies, especially in the world of decentralized finance (DeFi).
The Stakes Are High (No Pun Intended)
The IRS had previously refunded the Jarretts some of the taxes they paid on their staking rewards from 2019, hoping to close the case. But the Jarretts refused the refund—they want a court decision that will benefit everyone, not just them. That’s why they’re back in court.
They’re asking for their taxes to be refunded and for the IRS to stop taxing staking rewards as income. They’ve even teamed up with a think tank called Coin Center, which supports the case, arguing that these tax rules are holding back Americans from fully embracing cryptocurrencies.
How This Can Build Your Knowledge
Learning about this case helps you understand two big things in the crypto world:
- How taxes affect your earnings from crypto investments. If you ever consider staking, mining, or earning cryptocurrency, understanding the tax implications is crucial for managing your finances.
- Why laws and regulations are important in the crypto space. Right now, laws around crypto are still being formed, and cases like this help shape the future. Staying informed gives you an edge if you plan to invest or work in this industry.
Steps to Build on This Knowledge:
- Understand Staking: Dive deeper into how staking works and the block rewards process in cryptocurrencies like Tezos, Ethereum, and others.
- Learn About Crypto Taxes: Research how the IRS treats different crypto activities, like trading, staking, and mining, so you’re prepared if you ever participate in these.
- Follow Legal Changes: Keep an eye on similar legal cases, because these rulings will influence the future of crypto in the U.S. and around the world.
Key Terms:
- Staking: Locking up cryptocurrency to help secure a blockchain network and earn rewards.
- Block rewards: The new tokens you earn from staking.
- IRS (Internal Revenue Service): The U.S. government agency responsible for collecting taxes and enforcing tax laws.
This case is about more than just a couple of staked tokens—it’s about the future of cryptocurrency in the United States and could determine whether staking remains a profitable, fair way to earn in the crypto space.
