Taxation of Cryptocurrency Tokens Ruling Reignites Blockchain Legal Debate

Attorney Jeffrey M. Glassman writes that the case Jarrett v. United States addresses whether cryptocurrency tokens created through staking, specifically Tezos tokens, constitute taxable income.

The IRS refunded the disputed amount in the initial lawsuit, effectively rendering the case moot, and the court dismissed it. However, in August 2023, the IRS solidified its stance in Revenue Ruling 2023-14, classifying tokens generated from staking as taxable income.

The Jarretts have since filed another lawsuit, reigniting this critical legal issue for the cryptocurrency industry. In the initial lawsuit, the Jarretts argued that cryptocurrency tokens created via staking should not be considered income until sold, akin to new property like crops or manufactured goods.

The government refunded their contested amount but declined to rule on the substantive tax question, prompting the court to dismiss the case as moot. After the Jarretts’ appeal failed, the IRS issued Revenue Ruling 2023-14, which states that staked tokens’ fair market value at the point of control constitutes taxable income. The Jarretts filed a new case, maintaining that creating new tokens through staking is not taxable income until sold.

While the court initially dismissed the case due to mootness, the Jarretts’ new filing challenges the IRS’s Revenue Ruling, directly addressing the taxation of staked cryptocurrency. The ruling clarifies the IRS’s position but leaves open the broader question of whether staking-generated tokens constitute taxable income, which may now receive judicial scrutiny given the IRS’s firm stance.

This case has significant implications for tax treatment in the growing cryptocurrency sector. Firms should monitor developments closely, as a resolution could broadly set precedents impacting proof-of-stake networks and blockchain technology.

Advising clients in the cryptocurrency space may require proactive tax planning to navigate potential liabilities under the IRS’s evolving regulatory framework.