Tezos staker Josh Jarrett has initiated a new lawsuit against the Internal Revenue Service (IRS), aiming to overturn its policy that mandates token rewards be classified as income in the year they are earned. This legal battle is supported by the Washington D.C.-based think tank Coin Center, as noted by Communications Director Neeraj K. Agrawal.
Jarrett's latest case, filed on Thursday, seeks a permanent injunction against treating tokens generated by him and his spouse, Jessica Jarrett, as income. They are also pursuing a refund of $12,179 for taxes paid on 13,000 Tezos tokens earned in 2020.
This lawsuit follows a previous legal challenge against the IRS in 2021. Jarrett contended that 8,876 Tezos tokens earned as staking rewards in 2019 should be considered property rather than income, thus subject to taxation at the time of sale instead of when accrued. Despite not selling those tokens that year, he paid the assumed tax and subsequently filed for a refund under tax codes 7421 and 7422.
In 2022, the IRS attempted to dismiss Jarrett's case by offering a $4,000 tax refund for income taxes on his Tezos staking rewards. Jarrett declined this refund, opting to continue his pursuit in court, with backing from various pro-crypto organizations like the Proof of Stake Alliance and Coin Center. However, in September 2024, a Sixth Circuit court dismissed the case, stating the IRS had issued a full $4,001.83 refund and that Jarrett was not liable for taxes on his 2019 staking rewards, making the case 'moot'. This ruling contradicts the IRS policy from 2023 that requires token rewards to be treated as income when earned.
Jarrett's latest lawsuit emphasizes that in all other contexts, the IRS recognizes that new property is not taxable income until sold. The lawsuit asserts that taxpayers like Jarrett deserve judicial clarification on the law rather than relying on an unaccountable agency.
Coin Center, which submitted an amicus brief in Jarrett's original case, argues that federal tax regulations labeling staking returns as revenue could dissuade participation in decentralized networks. Agrawal stated, 'We believe that taxpayers like Josh have the right to have a court decide what the law is.'
