Josh Jarrett has initiated a lawsuit against the Internal Revenue Service (IRS) over its policy of taxing cryptocurrency block rewards as income upon their creation. The IRS's stance has been criticized by Coin Center, which is assisting Jarrett in this legal battle, as it advocates for tax parity for block rewards.
Block rewards are new cryptocurrency tokens that validators earn when they add new blocks to a blockchain. The IRS currently treats these tokens as income from the moment they are generated, a position that Jarrett and Coin Center argue is illegal. They claim these rewards should be considered new property, not income, until they are sold or exchanged for other assets.
Jarrett previously sought clarity on his tax obligations regarding block rewards but faced challenges in getting definitive guidance from the IRS. In 2021, after filing suit against the agency, his case was dismissed following a refund from the IRS without any explanation of future tax obligations. Despite this refund seemingly acknowledging Jarrett's argument that block rewards were not taxable income at creation, subsequent IRS guidance stated otherwise.
Josh stakes on the Tezos network and acquired approximately 13,000 Tezos tokens in 2020 through staking activities. The IRS's current policy requires taxpayers like him to pay income tax based on the value of each token at acquisition—a requirement he believes is unfair and stifles innovation.
The broader implications of this case extend to how cryptocurrencies and decentralized technologies are taxed. Under existing IRS guidelines issued in 2023, validators must report these tokens as income immediately upon receipt, a rule seen as burdensome given that millions of token holders could face similar compliance issues.
Coin Center supports legislative changes such as the Virtual Currency Tax Fairness Act to create exemptions for small crypto transactions. However, it emphasizes that courts should interpret existing laws rather than unaccountable agencies like the IRS dictating terms unilaterally.
This legal challenge also touches on congressional discussions about whether taxes should only be due upon sale or disposition of tokens—a matter currently under consideration in proposed legislation introduced earlier this year.
Coin Center insists taxpayers have a right to clear legal standards without undue ambiguity or penalties from governmental bodies discouraging lawful activities within emerging technological spaces like blockchain networks.
