No Precedent: IRS Court Settlement Doesn't Clarify Crypto Staking Taxes

There is yet to be a conclusive court ruling regarding the taxation of staked crypto rewards; however, a recent case demonstrates industry progression. Read the full article by Rachel Wolfson “Neither this post nor any other on cryptofal.com should be taken as financial advice. It is not.”

Paying your taxes is already confusing enough for most Americans and adding crypto gains can make it even more confusing. What makes it even more confusing is that the IRS does not know what they’re doing either. Last May, a couple from Nashville filed a lawsuit against the IRS for taxes they had to pay on their unclaimed staking rewards. The lawsuit has since ended and the couple received close to $4,000 back from the IRS.

This caused even more confusion since people were under the impression that the IRS would not tax unsold staked crypto. This idea was also run by media outlets including Forbes which said, “This is a huge win for crypto holders in the U.S. In light of this new information, even without this formal court ruling, some taxpayers might decide to follow a bit aggressive approach and not report staking income at the time of receipt.”

Head of government relations at TaxBit, Seth Wilks, told Cointelegraph that this was simply misinformation because there was never a ruling made on the situation. Wilks also said, “From a legal standpoint, I envision the Department of Justice — which is the law firm for the IRS in these matters — will file a motion with the court to have the case dismissed, citing mootness, meaning it’s no longer applicable since a refund was issued.”

This would mean that nothing has changed realistically from the IRS standpoint and they will still be taxing staking the same as they had been; however, the couple involved in the lawsuit also released a statement that show their intentions for the case which was simply for the IRS to clarify how they are taxing staking rewards.

The only reasonable next step is for clarity to be given for taxpayers and for the IRS because there are no clear definitions available for them when it comes to determining the tax code something like staking falls under. Somehow the IRS would need to get guidance from outside consultants on what they should do going forward.

As of right now, the IRS does have guidance when it comes to crypto mining and could use that for staking since it is similar. “If you follow and apply IRS Notice 2014–21, the guidance on mining income, a staking reward is taxable as ordinary income at its fair market value on the date you receive it,” said Wilkes in a TaxBit blog post.

Globally this is an issue for citizens because there has been almost no clarity from any governing body as to what they are going to do when it comes to taxing crypto gains. The best we can do for now is pay it the same as your capital gains on your stocks for regular gains. Staking may be a good way for passive income, but it will be tricky when it comes to filing their taxes.