The US Internal Revenue Service has officially classified cryptocurrency staking rewards as taxable income.

The US Internal Revenue Service (IRS) has officially classified Cryptocurrency stake rewards as taxable income. Details can be found in Tax Ruling 2023-14. This ruling requires that stake rewards be included in the taxpayer's total income for the tax year in which they gained control and dominion over the Cryptocurrency.

The decision of the US Internal Revenue Service is based on a lawsuit filed by Cryptocurrency investors Joshua Jarrett and his wife Jessica Jarrett. The Jarretts believe that these tokens should only be taxed when sold or transferred, not at the moment of creation. However, the IRS reiterated its position that stake rewards should be taxed as ordinary income when received, and tokens generated through stake should be treated as income.

According to Bloomberg, the US Internal Revenue Service has denied the argument in the second lawsuit brought by the couple Joshua Jarrett, claiming that rewards constitute taxable income upon receipt. The IRS responded, "Taxpayers required to stake rewards under Revenue Ruling 2023-14 are to report the rewards as income at fair market value when they are able to sell, exchange, or otherwise dispose of the rewards."

Stake is the process of locking Cryptocurrency in a smart contract to help run the blockchain. By doing so, investors can help verify transactions and secure the network, and in exchange, investors can receive rewards, usually in the form of more Cryptocurrency. This is a way to earn passive income by holding digital assets.

According to the guidance from the US Internal Revenue Service in 2023, blockchain rewards (such as stake) are classified as 'income' from the date of creation and taxed based on the estimated market value of the tokens at that time.

The updated guidance further clarifies that stake rewards become taxable when taxpayers have control over the assets, meaning they can freely transfer, spend, or trade these tokens. This ruling is significant for taxpayers engaging in Crypto asset stake activities, as they are now obligated to report these rewards on their tax returns, taxpayers must report stake rewards as 'Other Income' on Schedule 1 of Form 1040, and report capital gains on Form 1040 Schedule D upon disposition.

Joshua Jarrett couple's tax dispute

The tax dispute of the Jarrett couple has been ongoing since 2021, when the couple filed the first lawsuit against the IRS for 8,876 Tezos.

They believe that these tokens are similar to a farmer's crops or an author's manuscript and should be treated as 'property' and only taxed when sold. The IRS offered a $4,000 refund, but the Jarretts declined. The court later dismissed the case.

The Jarretts filed a second lawsuit in October 2024, seeking to treat their stake rewards as property and taxed only at the time of sale.

In a new complaint, they demanded the return of the $12,179 tax paid on the 13,000 XTZ tokens earned in the 2020 tax year, and a permanent injunction against the IRS's current tax treatment of their tokens. The lawsuit argues, "The new property is not taxable income; on the contrary, taxable income comes from the sale proceeds of the new property. In all other circumstances, the IRS acknowledges that new property is not taxable income." However, the arguments in this second lawsuit were still denied by the IRS.

For taxpayers engaged in the Crypto Assets stake, this ruling means they must accurately determine its fair market value when gaining control of the stake reward. Due to the inherent volatility of Crypto Assets prices, this could cause significant trouble.

This article was first published in Blockcast.