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How are staking rewards taxed?

On Behalf of | Oct 21, 2022 | Tax Court Litigation

The way PoW blockchain mining is taxed has been officially addressed by the IRS, but the tax treatment of staking rewards has still been left unclear. This leaves plenty of room for stakers in Georgia to interpret the tax law but not necessarily any wider of a margin for error.

Who are stakers and what do they do?

Stakers are taxpayers who take part in validating the PoS for blockchain transactions. These validators are chosen through a combination of random selection and how many units comprise their stake and how long they’re willing to keep the stakes in a particular digital wallet. PoS stands for proof of stake and refers to a consensus mechanism used for confirming cryptocurrency transactions.

The laws governing how staking rewards are taxed are still unclear at best and still completely undefined for the most part. This means the world that stakers are operating in is largely uncharted territory.

Recent case sparks new development

But a groundbreaking case in the Middle District of Tennessee may have set a new precedent to help clear up the legal discrepancies. In Jarrett v. United States, the individual filed a lawsuit to be refunded the taxes paid on staking rewards. The question now at hand is if staking reward receipts creates taxable income at the time when those rewards were acquired.

There was a further development in this case when the IRS made a refund offer to the taxpayer on February 3rd, 2022. But the individual didn’t accept the refund because it would be a definitive ruling and would be binding on the Internal Revenue Service.

To this day, taxpayers lack guidance from the government regarding how staking rewards are taxed. And although a new precedent might have been set in the recent case, it’s possible that it will take years for anything to come of it.