Good News on Crypto Taxation

I argued:

Suppose you buy an apple tree and it grows apples. You don’t sell any apples. (Maybe you use the apples to plant more trees). The IRS demands that you pay income on market value of the apples even though you haven’t sold any. Crazy! Yet that is how the US taxes staking.

Well it turns out that the IRS agrees with me (!) or at least believes that the courts were likely to side with the argument I sketched. The Proof of Stake Alliance writes:

[I]n 2020, Abe Sutherland’s 2020 Tax Notes brief argued that these tokens should be taxed when they are sold, not when they are created – like all property– and that treating this property created by staking as the taxpayer’s immediate income would be contrary to over 100 years of tax law.

The IRS has signaled that it agrees in a new case: After Joshua Jarrett paid income tax on staking rewards he created in 2019, he sued the IRS for a refund. On Thursday, he will announce that the IRS granted this refund. Nevertheless, Josh and the legal team at Fenwick will reject the refund and  continue to sue the IRS in order to force the agency to offer explicit guidance that states that staking rewards will be taxed as property, not income. Only through this definitive statement will taxpayers in the growing proof of stake industry be able to plan for their futures.

This case has significant implications for the tax industry, as it will determine how staking rewards are taxed in the future. POSA is supporting and elevating Josh and this case to demand the IRS offer explicit guidance that staking rewards, as property, should be taxed when they are SOLD, not when they are created. 

Assuming this falls into place, as looks likely, this offers significant clarity to current tax law on crypto. Note that this does not mean that crypto is taxed less–it is still taxed when sold–it’s more about creating simplicity and consistency in the code. See also Tyler’s post, We need a better tax system for crypto.

Special congratulations to Abe Sutherland.

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