Unsold Crypto Case Victory Against IRS Could Set Precedent for Regulation Laws

In an unprecedented case, a Nashville couple went against the Internal Revenue Service (IRS) to get a refund on their taxed crypto. The couple argued that their unclaimed and unsold Tezos staking rewards should not be taxed as income, Forbes reported.

The IRS has agreed to issue the couple a refund – a decision that could completely change the way taxes and regulations apply to cryptocurrency rewards earned via staking. At the moment, the law sees staking rewards as income, and appropriate taxes apply when these rewards are gained.

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As an aftermath of the case, it’s possible that crypto staking rewards will only be taxed after the owner sells them for USD.

According to court files, Joshua and Jessica Jarrett “baked”—the term for staking used within the Tezos ecosystem—8,876 Tezos (XTZ) in 2019, which they reported as “other income” on their tax form. The couple had to pay $3,293 on the $9,407 that their XTZ was worth at the time. Currently, this amount would be worth over $34,000.

The complaint was officially filed in May 2021, stating that the cryptocurrency should not have been taxed as income. The Jarretts argued:

The United States here seeks to use the federal income tax law to do something unprecedented, which is tax creative activity rather than income. Taxing newly created cakes, books, or tokens as income would have far-reaching and detrimental effects on taxpayers and the U.S. economy.

Based on court filings expected to be made public Thursday, the IRS would refund the total taxed amount “with statutory interest as provided by the law.” 

While the US government has set some regulatory measures in place for crypto, there is little guidance on taxing unclaimed staking rewards. Taxpayers have to report if they have “received, sold, exchanged, or otherwise disposed of any financial interest in any virtual currency.” However, these criteria may not properly fit unsold and unclaimed rewards.

The aftermath of this case will likely already be noticeable in the upcoming months, as half of all Bitcoin owners are filing taxes on their cryptocurrency for the first time, based on a Grayscale survey.