POSA Deems New IRS Stance on Staking Rewards Duplicative and Burdensome Taxation for Millions of Staking Participants

 1/24/2023

On Friday, January 20th, the IRS updated their web page on digital assets for the 2023 tax filing season. Included in that informal guidance for taxpayers was an interpretation of staking and digital asset property law: “Taxable gain or loss may result from transactions including….Receipt of a new digital asset as a result of mining or staking activities”.

POSA has advocated since its inception for legal and regulatory clarity when it comes to Proof of Stake blockchain ecosystems. One of the issues core to that advocacy is the matter of fair staking reward taxation: as with any example of created property (baking bread, breeding cattle, writing a book, creating a piece of art), the taxable event is not at the point of creation, but solely at the point of disposition. In 2019, Tezos staker Joshua Jarrett, after the IRS alleged he owed taxes on all issuance of $XTZ staking rewards – not just the $XTZ he’d sold – took the IRS to court. The IRS mailed Josh a check to try to make his claims go away. In an effort to gain definitive judgment, Jarrett – supported by the Proof of Stake Alliance – pressed his case. In October of 2022, at the IRS’ request, the court dismissed the case on procedural grounds (IRS argued the offer of a refund concluded the matter); Josh is appealing.

It is with great disappointment, therefore, that we saw the IRS this past Friday update its website to suggest that staking rewards are immediately taxable income - something that should have been determined definitively for all Americans in a court of law.

POSA maintains that this guidance evinces a misunderstanding of the nature of blockchain consensus, and establishes a regime of duplicative and burdensome taxation for the millions of staking participants in the United States. Indeed, Senator Cynthia Lummis (R-WY) and Senator Kirsten Gillibrand (D-NY) have recognized the need for definitive clarity on this issue. Their bill, the Responsible Financial Innovation Act (S.4356), clarifies the tax code to ensure that staking rewards are taxed only upon sale or exchange. 

POSA continues to support efforts on Capitol Hill to definitively clarify the tax treatment of digital asset property created through staking activities, and looks forward to partnering with our friends in Congress to pass legislative tax clarity for staking participants in America.