Casey Wagner

<div id="highlights-block_62a8b418e6a12" class="highlights">
 <ul>
 <li>Lummis/Gillibrand bill clarifies that unrealized staking and mining gains should not be taxed as income</li>
 <li>The bill, if passed, would impact a tax law one Tennessee couple has been fighting for over a year</li>
 </ul>
 
</div>



The long-awaited US digital asset bill introduced earlier this month provides clarity that could change the outcome of one legal battle currently underway.&nbsp;



The <a href="https://www.gillibrand.senate.gov/imo/media/doc/Lummis-Gillibrand%20Responsible%20Financial%20Innovation%20Act%20%5bFinal%5d.pdf" target="_blank" rel="noreferrer noopener">Responsible Financial Innovation Act</a>, co-sponsored by Sens. Cynthia Lummis, R-Wyo., and Kirsten Gillibrand, D-N.Y., states that miners and stakers would only have to pay income taxes on realized rewards — when the associated digital assets are sold. 



Income generated by digital asset mining and staking “shall not be included in the gross income of the taxpayer” until the taxpayer sells or trades the assets, the bill says.



The clause would change a tax law one Nashville couple has been fighting for over a year.&nbsp;



In May 2021, Joshua and Jessica Jarrett requested a refund of $3,293 of income tax paid in 2019 for the receipt of 8,876 Tezos tokens, according to a legal <a href="https://www.scribd.com/document/509435727/Jarrett-Compl?secret_password=LFIAqtDNw9i5loKXdjB4" target="_blank" rel="noreferrer noopener">complaint</a> filed on May 26, 2021, with the US District Court for the Middle District of Tennessee. The couple also sought a $500 increase in tax credits for lost income. 



Tokens attained through proof-of-stake protocols are taxpayer-created property and should not be taxed until sold or exchanged, the Jarretts argued. The complaint claims that nothing under United States law, nor IRS code and regulations, allows taxpayer-created property to be taxed as income.&nbsp;



The IRS offered the Jarretts a refund in December. The couple refused, choosing instead to continue to fight the matter in court. In March, the <a href="https://cms.blockworks.co/doj-moves-to-dismiss-tezos-staking-tax-case-in-closely-watched-crypto-dispute/" target="_blank" rel="noreferrer noopener">Department of Justice</a> urged a judge to dismiss the case. A bench trial is currently set for March 2023.



As the law currently stands, stakers and miners are required to pay taxes on rewards as if they were income — the law does not consider if the tokens were sold or traded.



“This has been actually catastrophic for some clients that stake, for example, UST and via some of these very high-yield staking platforms,” Andrew Gordon, tax attorney and president of Gordon Law Group, said. “You are paying tax on those rewards at the fair market value as they&#8217;re coming in, not when you sell it, but as it comes in.”&nbsp;



This bill, if passed, Gordon said, would create a strong incentive to bring miners and stakers to the US.&nbsp;



The crypto bill now faces a lengthy vetting process, with it next moving into committee. Gillibrand serves on the agriculture committee, which has oversight of the Commodities Futures Trading Commission, and Lummis serves on the banking committee, which oversees the SEC.



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New Crypto Bill Suggests Unrealized Staking Gains Should Not Be Taxed

<div id="highlights-block_621ff5f176270" class="highlights">
 <ul>
 <li>The Department of Justice claims the case should be dismissed because the refund has been issued</li>
 <li>The couple said in February they would refuse the tax refund offered</li>
 </ul>
 
</div>



The Department of Justice has urged a judge to dismiss a Nashville couple’s bid to take a dispute over taxes related to unsold Tezos tokens to court.



In December 2021, the IRS <a href="https://cms.blockworks.co/in-win-for-crypto-stakers-irs-offers-refund-on-untraded-token-rewards/" target="_blank" rel="noreferrer noopener">offered to refund</a> Joshua and Jessica Jarrett taxes paid on rewards gained — but not redeemed — from staking on the Tezos blockchain, the couple said. The Jarretts said they would refuse the refund of $3,793, plus $208.03 in interest, opting instead to try for a court ruling in their favor.



Industry participants have closely watched the outcome of the case, which has broad implications for the financing of crypto staking.



“The Jarretts&#8217; suggestion that they can refuse a full refund to seek a ruling about the taxability of tezos reward tokens has no merit,” the Department of Justice wrote in a Friday court <a href="https://drive.google.com/file/d/1ueIdPt6gT3DNtSQf56dDo-m2PpeAweWt/view" target="_blank" rel="noreferrer noopener">filing</a>.



The Jarretts requested the refund in May 2021 for income tax paid in 2019 for the receipt of 8,876 Tezos tokens, according to a <a href="https://www.scribd.com/document/509435727/Jarrett-Compl?secret_password=LFIAqtDNw9i5loKXdjB4" target="_blank" rel="noreferrer noopener">complaint</a> filed on May 26, 2021. 



At the time of the refusal, industry group Proof of Stake Alliance (POSA), a partial funder of the initial lawsuit, said that in turning down the reimbursement, the Jarretts set the stage for a wide-sweeping legal precedent.



“POSA, and the broad coalition it represents, applauds Jarrett’s decision to continue his lawsuit,” POSA said in a February <a href="https://www.prnewswire.com/news-releases/irs-waves-white-flag-in-lawsuit-over-taxability-of-cryptocurrency-staking-rewards-301474899.html" target="_blank" rel="noreferrer noopener">statement</a>. “He has rejected the IRS’s offer of a refund, opening up the possibility of a court ruling that will give him, and millions of other taxpayers in the same position, the ability to confidently plan for the future.”



The refund and dismissal — if it happens — still does not set a precedent in terms of tax clarity around staking more broadly, digital assets accountants say.&nbsp;



“[It’s] too early to say when staking income should be taxed or if you can rely on this case,” said Shehan Chandrasekera, and head of tax at crypto accounting firm Coin Tracker. “I&#8217;d default to the conservative approach [taxed at the time of receipt] until we get clear guidance.”



A spokesperson for the Jarretts and a representative for the Department of Justice did not immediately respond to a request for comment.



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Start your day with top crypto insights from David Canellis and Katherine Ross. <a href="https://blockworks.co/newsletter/empire">Subscribe to the Empire newsletter</a>.



Explore the growing intersection between crypto, macroeconomics, policy and finance with Ben Strack, Casey Wagner and Felix Jauvin. <a href="https://blockworks.co/newsletter/onthemargin">Subscribe to the Forward Guidance newsletter</a>.



Get alpha directly in your inbox with the <a href="https://blockworks.co/newsletter/research">0xResearch newsletter</a> — market highlights, charts, degen trade ideas, governance updates, and more.



The Lightspeed newsletter is all things Solana, in your inbox, every day. <a href="https://blockworks.co/newsletter/lightspeed">Subscribe to daily Solana news</a> from Jack Kubinec and Jeff Albus.

Joshua Jarrett