Will you be taxed for hodling your staked Crypto?

IRS refunds income tax on staked, unsold crypto

Treasury has come out clearly to state that crypto miners and stakers would be exempt from IRS reporting rules at least in the near term.

But one wonders how we got here.

How did we get here?

A couple in Nashville, TN might be the first in history to win a crypto tax refund against the Internal Revenue Service. The IRS declared in court filings made public on Thursday, that it refunded over $3000 to Joshua and Jessica Jarrett who had filed the amount on over 8000 Tezos tokens which they had obtained as a result of staking.

The couple, in a civil lawsuit filed back in May 2021 expresses the fact that no taxable event had occurred since they had not yet converted the tokens in a readily accessible form of wealth. As such, the couple argues that the tokens are new property and not income since they had not yet sold the tokens.

Huge Precedent

The decision will set a major precedent as much as the IRS drags its feet to formulate policy towards defining and taxing crypto assets. In the 2021 version of IRS form 1040, a line item quizzes those filing income tax, whether at any time during the reporting period they 'received, sold, exchanged, or otherwise disposed of any financial interest in any virtual currency'. This alone shows that IRS is focused on taxing crypto assets in the near term.

Nevertheless, this decision contradicts IRS instructions issued in December 2021 which defines a ‘transaction involving virtual currency’ as one that included ‘the receipt of new virtual currency as a result of mining and staking activities’. This has created confusion among many in the crypto community.

The decision has generated waves in the crypto community and it remains unclear whether IRS will update its guidelines to exempt mined and staked crypto assets in line with the verdict. The 2021 tax filing period opened last week and many are still in limbo regarding how to treat their mined and staked crypto assets while declaring their income tax. Regardless of how IRS will react to the decision, this would set a national as well as effect policy globally towards regulating, defining, and taxing crypto assets.

Capital Gains vs Crypto Gains

Whether the ruling will inform policy on taxing crypto assets remains to be seen. If you are to think of staking as holding stocks of a particular company, you know that you are only taxed on capital gains when you sell your stock after it appreciates. Thus this is a clear taxable event that is based on existing policy.