TL; DR Breakdown
- The PoS validator declined the IRS’s offer of a tax refund and instead called for a clear policy on staking taxation.
- Tezos validator sued the federal tax agency May last year.
The United States couple from Nashville, Tennessee, who sued the federal tax agency over Tezos (XTZ) staking rewards taxation, decided to relinquish their legal victory. Instead, Joshua and Jessica Jarret opted to take a different fight to court, resulting in legislative reform.
The IRS vs. the Nashville couple
Towards the end of May of last year, a married couple in Nashville, Tennessee, filed a lawsuit against the IRS. The dispute concerning tax payments made on Tezos blockchain staking rewards.
Joshua and Jessica Jarrett filed a claim for the return of income tax expenses totaling $3,293 to receive 8,876 Tezos tokens. In addition, the Jarretts asked for a $500 boost in tax credits for lost income.
The couples’ lawsuit was the first major action against the IRS regarding crypto staking rewards. The Jarretts were charged tax on the tezos tokens before they were sold or exchanged. In the United States, Federal income tax rules do not allow staking businesses to be taxed.
As of then, the IRS had yet to provide clear instructions on crypto-asset taxation when staking is involved. The Jarretts proceeded to file for a refund, which the IRS ignored.
IRS tax refund countered for clear policy on staking taxation
Today, the crux of the lawsuit is whether staking rewards are considered taxable income or created property. Until it is sold, the latter is not taxed. On February 3, Joshua Jarrett announced that the United States government had agreed to refund the taxes in question as part of the settlement.
Once an agreement was reached, and the United States government stood to pay the tax refund, it all but appeared to be a victory for the Jarretts. However, Joshua later discovered that nothing would stop the tax service from taxing his staking rewards a second time without a court order.
The IRS tax refund would have been the end-all, be-all. However, Jarrett’s statement shows that his ultimate objective is to get the IRS to clarify its stance on staking and block rewards taxes. The clarification is for both Proof of Stake and Proof of Work systems.
Up to date, the federal tax agency is yet to offer a clear tax direction on the tax position for staking rewards. Hence, investors cannot guarantee that their income will not be taxed without clear guidelines.
According to Reid Yager, a former employee of POSA, the IRS and DOJ decision to provide a refund without taking action to fix poor policy puts America’s companies and innovation at risk.
Finally, a future court decision on whether staking rewards are taxable income or not will have a significant impact on the PoS business.