PoS validator turns down IRS tax refund offer, pushes for clear policy on staking taxation

The Tezos validator who took the IRS to court argues that staking rewards should be treated as created property rather than income.

A United States couple suing the federal tax agency over Tezos (XTZ) staking rewards taxation chose to forego a tactical victory and engage in a court battle that could eventually result in policy change.

Joshua and Jessica Jarrett, who run a node on the Tezos network (thus “baking” new blocks, in the ecosystem’s lingo), have sued the Internal Revenue Service (IRS) over the taxes paid on the XTZ tokens created in 2019. The Jarretts filed a refund claim on upwards of $3,000 paid on the tokens, which the IRS ignored.

The fundamental point of contention underlying the lawsuit is the classification of staking rewards as either taxable income or created property, which is not taxed until it is sold. The Tezos bakers argue that earning coins by staking is akin to baking a cake or writing a book, and thus these coins should not be treated as taxable income.

Related: Crypto staking rewards and their unfair taxation in the US

On Feb. 3, Joshua Jarrett released a statement that the U.S. Government has offered a refund of the taxes in question as part of the settlement. Jarett said that “At first glance, this seemed like great news,” but he later realized that without a court ruling, there would be nothing to prevent the tax service from taxing his staking rewards again. Jarrett said:

A year and a half into this process, the government didn’t want to defend the position that the tokens I created through staking were taxable income. […] I need a better answer. So I refused the government’s offer to pay me a refund.

Jarrett’s statement further indicates that his ultimate goal is to get the IRS to clarify its position on taxing staking and block rewards “for both Proof of Stake and Proof of Work” systems. He maintained that, while no guidance exists on this matter, the tax authority’s concession in his case could be interpreted as support for the position that staking rewards are not taxable income.

Reid Yager, former staffer at industry advocacy group Proof of Stake Alliance (POSA), stated:

The decision by the IRS and DOJ to offer a refund without taking steps to correct poor policy places American businesses and American innovation at risk.

A subsequent court ruling on whether staking rewards are taxable income or not will likely become a critical juncture for the PoS industry.