The issue regarding crypto taxes has been a hot topic for those that own, invest, and trade cryptocurrency. Could staking be a way for crypto owners, hodlers, investors, and traders to avoid or prolong crypto tax?
IRS 'Failed to Issue Any Clear Guidance on the Matter'
According to the story by Forbes, taxation of staking rewards has remained a controversial topic for a number of years. The article notes that this is "because the IRS has failed to issue any clear guidance on this matter."
Due to the lack of clear guidelines, many taxpayers report income when they "receive staking rewards." To better understand the issue, a case in 2019 showed how crypto tax could be quite complicated when it comes to staking.
Nashville Couple Received 8,876 XTZ in Staking Rewards
The case involved the Jarrets, a couple from Nashville, that received 8,876 XTZ or Tezos in staking rewards. The coins were reportedly worth $9,407 during the receipt, and the couple paid their taxes based on that.
The couple then filed an amended tax return on July 31, 2020 noting that the "$9,407 staking income shouldn't have been income in the first place." With that, "the amended return then demanded a $3,793 tax refund from the IRS."
US Department of Justice's Tax Division Ordered the IRS to Issue a Refund
The couple made a complaint dated May 21, 2021 arguing that "newly created property is taxed only at the time of sale, not at the time of the receipt." In response to the complaint, the US Department of Justice's Tax division made the IRS issue a refund of $3,793 during a later December 20, 2021.
What makes it interesting is when the Nashville couple refused the IRS' refund due to them not acknowledging the true reason for issuing the said refund. Forbes notes that the reasoning is important to help create a precedent for other stakers and protect themselves from scrutiny from the IRS later in the future.
Unclear Response to Taxable Income from Staking
The Jarretts then decided to take the case to court in order to get a formal court ruling, and up until now, the case is still ongoing. Joshua Jarret released a statement saying in late December 2021, revealing they had received a letter that the government wanted to give them a refund which meant it was a year and a half into the process.
Jarrett noted that "the government didn't want to defend the position that the tokens I created through staking were taxable income." Although Jarret said that initially, this was great news, unless the case gets the court's official ruling, "there will be nothing to prevent the IRS from challenging me again after the issue.
What Does the Current Tax Law Say About Staking?
Jarrett noted that he refused the government's offer to pay him the refund and that he needed a "better answer." To add, the article by Forbes noted that due to the IRS offering the Jarretts a refund, this "signals that staking rewards should not be taxed at the time of receipt."
The ongoing case shows how complicated the tax on staking rewards are, and despite there being tax guidance on mining income that was issued on Notice 2014-21, "mining income should be reported on your taxes at the time you receive the rewards. When you sell those minted coins, another taxable event is triggered."
As of the moment, Forbes notes that it is better to contact a tax adviser. Another potential issue could be whether or not the staked rewards will be compounded or sold right away.
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This article is owned by Tech Times
Written by Urian B.
