The US tax regulator, the Internal Revenue Service (IRS), has reaffirmed its position on cryptocurrency staking, clarifying that rewards generated from staking activities are subject to tax once they are received. The IRS added that staking bonuses do not constitute new property and are therefore subject to immediate taxes upon creation.
The IRS confirms that a cryptocurrency deposit is taxable upon receipt
According to the latest Bloomberg a reportthe IRS reiterated its position that digital asset staking rewards should be taxed as income once they are created and made available to the recipient. This finding is expected to have broad implications for the treatment of betting bonuses under US tax laws.
The regulator also clarified that staking does not create new ownership, refuting comparisons to agriculture, manufacturing or creative businesses. The IRS decision rejects the argument that cryptocurrencies generated by staking should only be taxed when sold or exchanged.
The IRS’s position relates to an ongoing legal dispute involving Tennessee residents, Joshua Garrett and Jessica Garrett. The pair – who bet with the cryptocurrency on the Tezos (XTZ) network – argued that their accumulated rewards should not be taxed until they are sold or exchanged for other assets. They claimed that their rewards represented “new ownership,” similar to the crops reaped by a farmer or a book written by an author.
However, the IRS responded that all rewards generated from staking activities constitute taxable income upon receipt. The agency said in its official statement:
Revenue Ruling 2023-14 requires taxpayers who receive wagering bonuses to report the bonuses as income at their fair market value when having the ability to sell, exchange, or otherwise dispose of them.
For the uninitiated, cryptocurrency staking is the process of locking cryptocurrency into a blockchain network to help validate transactions and secure the network, earning rewards in return. It usually involves Proof of Stake (PoS) or similar consensus mechanisms, allowing participants to earn passive income on their holdings.
The 2023 IRS Guidance specifies that block rewards, including those earned through staking, must be treated as income at the time they are created. The tax liability for these rewards is based on their fair market value at the time of receipt, making it necessary for taxpayers to track the value of the tokens as they are earned.
Background on the tax dispute
The Jarrett family’s legal battle with the IRS began in 2021, when they filed a lawsuit over the taxation of 8,876 XTZ tokens earned as rewards in 2019. They argued that these rewards constituted “new property” and should not be taxed until sold. Or exchange it. .
Drawing comparisons with agriculture or manufacturing, the pair asserted that accumulated rewards should be treated like farmers’ crops, manufactured goods, or an author’s manuscript—taxable only when monetized.
In response, the IRS offered the couple a $4,000 tax refund, which they rejected in hopes of setting a legal precedent for all blockchain networks proving stake ownership. However, the court ultimately dismissed the case, ruling it moot due to the refund.
In October 2024, the Jarrett family filed a second lawsuit, seeking a tax refund of $12,179 for taxes paid in 2020 on approximately 13,000 XTZ tokens acquired through staking. They also sought a permanent injunction against the IRS’s current tax treatment of accrued bonuses. This issue is ongoing and may have broader implications for how cryptocurrency rewards are taxed in the United States.
To say that the IRS is going after cryptocurrency investors would be disingenuous, as the regulatory body has taken several actions Sizes To make it Easier For taxpayers to file their crypto taxes. However, legal forces in the United States are already pursuing individuals suspected To engage in malicious activities, including cryptocurrency tax evasion.
In related news, one of the individuals was recently convicted to two years in prison for failing to report capital gains from cryptocurrency sales between 2017 and 2019. At press time, Bitcoin is trading at $97,471, up 4.2% over the past 24 hours.
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