Tezos network stakers Josh Jarrett and his wife Jessica Jarrett have again filed a lawsuit against the Internal Revenue Service over its tax treatment of their tokens.
In the fresh Oct. 10 complaint filed in a Tennessee federal court, the Jarretts argue that their tokens created through staking should be treated as property and taxable only upon their sale, not before.
Staking tokens involves creating a “new property” because nobody else has owned them prior, making them the same as “a farmer’s crop, an author’s manuscript, or a manufacturer’s product” where no income is created until sale, they argued.
“New property is not taxable income; instead, taxable income arises from the proceeds from the sale of that new property. In all other contexts, the IRS recognizes that new property is not taxable income,” the Jarretts said.
According to 2023 guidance, the IRS lists block rewards — like staking — as “income” the moment they came into existence, with tax payable on the estimated market value of the tokens at the moment of creation.
The Jarrets are asking for a judgment declaring previous federal income taxes incorrectly assessed, a refund for $12,179 in taxes paid on 13,000 Tezos tokens earned in the 2020 tax year, and a permanent injunction against the IRS treating tokens created by them as income.
The Washington, DC, think tank Coin Center is assisting the pair in their litigation.
Coin Center said in an Oct. 9 statement that it’s backing the claim as tax laws — and federal agencies’ interpretations of those laws — have a “tremendous power to discourage Americans’ use of cryptocurrency and permissionless technologies.”
“Some of that is unavoidable unless laws are changed, which is why we’ve championed legislative changes like the Virtual Currency Tax Fairness Act, which would create a de minimis exemption for small personal crypto transactions,” it added.
The Jarret’s legal battle against the IRS began in 2021 when they sued the agency over 8,876 Tezos tokens earned as staking rewards in 2019.
They didn’t sell or exchange the tokens at the time but paid the assumed tax bill of $9,407 to the IRS.
They later filed a lawsuit for a refund of $3,293 and a $500 increase in tax credits resulting from a reduction in their income.
In 2022, the IRS successfully had the case dismissed in a Tennessee District Court after offering the Jarretts a $4,000 tax refund for income taxes paid on their Tezos staking rewards.
They refused, hoping to pursue the case in court and set a legal precedent for all proof-of-stake chains.
The IRS argued it had issued a full $4,000 refund and conceded the Jarrett’s were not liable for tax on the 2019 staking rewards, rendering the case “moot.”
Before this latest case, the Jarretts tried and failed to have the original lawsuit reinstated on appeal.
