IRS FUD and Joshua Jarrett’s Case

Staking (also referred as proof-of-stake) is a popular way of verifying blockchain transactions. Mining (or proof-of-work), another way of authenticating blockchain-based transactions, is sometimes compared to it.

 While the goal of staking is the same as that of mining (validating blockchain transactions and collecting reward tokens), it entails dedicating or pledging a specific cryptocurrency to maintain a blockchain protocol for transaction validation. Every time a new block is added to the protocol, a new coin within the same protocol is created, and members are rewarded.

Despite the fact that the US Internal Revenue Service’s crypto laws remain hazy in many areas, the agency has stated that virtual currency is recognized as an investable asset for tax reasons.

Crypto transactions are regarded the same as stock, bond, and mutual fund transactions when it comes to calculating taxable gains and losses.

If you sell cryptocurrency for more than you purchased it in less than a year, the profit will be taxed as a short-term capital gain. Short-term capital gains are generally avoided since they are taxed as ordinary income.

For tax reasons, the IRS deems cryptocurrency assets to be “property,” which implies your virtual currency is taxed similarly to any other assets you own, such as stocks or gold. Cryptocurrencies like Bitcoin and Ethereum are subject to capital gains tax restrictions. When you sell cryptocurrencies for a profit, the Internal Revenue Service (IRS) considers it a capital asset, and you must pay taxes on it. When you sell traditional investments like stocks or mutual funds at a profit, this is precisely what happens. 

The amount of capital gains taxes you owe is determined by whether you’ve owned your cryptocurrency for less than a year or more than a year.

Crypto transactions are regarded just like stock, bond, and mutual fund transactions when it comes to calculating taxable gains and losses.

If you sell cryptocurrency for more than you purchased it in less than a year, the profit will be taxed as a short-term capital gain. Short-term capital gains are generally avoided since they are taxed as ordinary income.

If you make a profit selling crypto that you’ve kept for more than a year, it’ll be treated as a long-term capital gain, which is ideal. Based on your income, you will pay a tax rate of zero, fifteen percent, or twenty percent.

You can experience a capital loss if you sell crypto for less than you paid for it, which might lower your taxable income or offset capital gains from the selling of other assets.

Joshua Jarrett used staking in 2019 to contribute to the development of new blocks on the Tezos public blockchain by using his existing Tezos tokens. As a result, Jarrett was able to create 8,876 additional Tezos tokens as staking rewards. Jarrett and his wife, Jessica, reported the staking awards as regular income on their 2019 joint federal income tax return and paid the associated taxes.

The Jarretts filed an updated tax return in July 2020, claiming that their staking prizes were not taxable income and requesting a refund of $3,793 from the IRS. The IRS first failed to reply to the refund request, allowing the Jarretts to sue for a refund in May 2021. According to the Jarretts’ case, federal income tax law prohibits the taxation of tokens generated through a staking company, and that tokens created through staking are really only taxable upon sale or exchange.

@nohardfoks tweeted how he spent almost two years pressing his argument that his Tezos staking rewards are not taxable income until sold.

First, he petitioned the IRS directly.

I’ve spent almost two years pressing my argument that my Tezos staking rewards are not taxable income until sold.

First, I petitioned the IRS directly. https://t.co/0Kq9eiydFI

When the IRS denied his claim, he filed a lawsuit in federal court. The government has offered him a refund and is seeking to have his lawsuit dismissed without admitting that he is correct. He is resisting it in order to obtain a final decision.

He argues that his case is a simple matter of tax law that should be decided by a court.

Until a property is sold, it is not taxed. So, rather than avoiding tax, his case is about “*when* I’m taxed and whether it’s fair.”

Taxing block rewards as income makes tax preparation extremely difficult. Every second, new blocks and tokens are created.

When block rewards are taxed as income, the effect is a massive over taxation.

The income tax system is designed to be neutral, not a government weapon used to discredit disfavored technology through fear mongering. 

” I don’t want to worry they’ll try to penalize me in future years. I need a judgment in my case.”

The good, the bad, and the basics of cryptocurrency’s inclusion in the IRS Voluntary Disclosure Program:

The Internal Revenue Service (IRS) has long had a Voluntary Disclosure Program (VDP) that permits taxpayers who knowingly omit specific information from their tax filings to regain “good standing” with the IRS. Cryptography was recently added to this programme via revisions to the VDP application instructions.

Although the IRS has previously focused on crypto enforcement, the inclusion of crypto in the VDP application instructions could be interpreted as a signal to taxpayers that substantial IRS action for crypto transactions is possible. The IRS may pursue taxpayer noncompliance in this area more aggressively as a result of the wider application. It’s also a final warning to taxpayers to get in compliance as soon as possible or face criminal prosecution, because eligibility for the VDP vanishes once a taxpayer is audited or examined by the IRS.

The IRS’s intent to pursue crypto enforcement should be clear with these amendments to the VDP instructions. The VDP is a viable alternative, but it should not be pursued without a thorough understanding of the program’s requirements, as well as the potential benefits and cons. It’s important emphasising that there are alternative possibilities where the failure to report was not “willful.”

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Dhirendra Chandra Das