POSA disagrees with the IRS’s view, announced on July 31, 2023 in a revenue ruling, that proof-of-stake block “rewards” are immediately taxable income (Rev. Rul. 2023-14). Resolution through the courts, or by an act of Congress, becomes all the more important – and urgent. POSA will continue to support both efforts. 

Josh Jarrett’s attempt to get a judicial determination of this issue is still in the courts, three years after he first petitioned the IRS. Josh asked for a refund because taxing his Tezos staking rewards as immediate income is economically indefensible and legally unsupportable. Taxpayer-created property is never taxable income. Such property gives rise to taxable income when it is sold or exchanged. 

To try to make Josh’s case go away, the IRS simultaneously acknowledged that he had overpaid his taxes but refused to acknowledge he was right on the law. The government reiterated that position just days ago, during court argument on Josh’s case. Now, in an administrative ruling that does not bind the courts but which the IRS expects will dissuade taxpayers from asserting their rights, the IRS announces to the world what it has been unwilling to defend in court. 

This attempt to regulate taxpayer activity through selective enforcement of IRS policy – sowing years of confusion followed by an announcement of bare legal conclusions and virtually no analysis – should upset all Americans who trust in the fair administration of the tax law.

Taxpayers will look in vain for persuasive analysis in the IRS’s ruling. The IRS states that “[u]nless otherwise provided by a Code or regulatory provision, any receipt of property constitutes gross income in the amount of its fair market value at the date and time at which it is reduced to undisputed possession.” By the by, it concludes that if a staker “receives additional units of cryptocurrency as rewards when validation occurs, the fair market value of the validation rewards received is included in the taxpayer's gross income[.]”

But this recitation of tax truisms ignores the position POSA, and Josh Jarrett and others, have been advancing for years. Stakers don’t “receive” their new tokens as payment from someone else. Stakers on decentralized cryptocurrency networks create new blocks, and with them new tokens. And like all other first owners of newly created property, stakers are not subject to the income tax until such property is sold or exchanged.

The IRS’s view also ignores the economic and practical reality of cryptocurrency. Including newly created tokens in income demonstrably overstates stakers’ gains. If every token holder receives 10 percent new tokens, then no one has economic gain from staking. Stakers would be taxed for maintaining the same share of tokens—and all else equal, the same value—over time. This overtaxation unfairly discourages taxpayer participation in the most equitable and democratic cryptocurrency networks.

And as many taxpayers know firsthand, the government’s position punishes taxpayers who stake and hold if their asset loses value. This results in an indefensible mismatch between ordinary income and capital losses which can result in tax that exceeds value gained. Adding insult to injury, treating every new block as a taxable event imposes punitive administrative burdens on taxpayers forced to account for each of those events. 

Fortunately, these problems are solved by taxing cryptocurrency the same as all new property – when it is sold.

A tax agency trying to accommodate the economic activity of taxpayers would address these concerns, not hide or ignore them. The courts, or Congress, must address what the IRS refuses to.

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See also:

Letter to the court filed in Joshua Jarrett v. United States | 8/1/2023