The world’s largest provider of cryptocurrency software, ConsenSys, said Tuesday that it would contribute money to a case that challenges the IRS’s right to tax staking rewards.
Joshua and Jessica Jarrett sued the IRS in 2021, claiming that self-generated staking rewards could not be regarded as taxable income under federal law, to recoup federal income taxes assessed on the Tennessee couple’s stake-generated Tezos.
The IRS offered to grant the Jarretts their proposed refund in the middle of the lawsuit, but the plaintiffs declined because they wanted guarantees from the court that the problem wouldn’t come up again. No such promises materialized, however; in October, a federal judge dismissed the case, finding that the Jarretts’ complaints were no longer valid because they had received a tax return.
Many people had hoped that the decision would provide the millions of cryptocurrency users who utilize proof-of-stake blockchains to create cryptocurrency every day with legal certainty. Such networks, probably most notably Ethereum, function through a method that incentivizes users to stake cryptocurrency with the network in order to verify on-chain transactions. Users amass newly created cryptocurrencies in exchange for holding those funds for protracted periods of time.
Therefore, it should come as no surprise that ConsenSys, the blockchain technology business founded by Joe Lubin, a co-founder of Ethereum, is paying careful attention to the Jarretts’ legal proceedings. (Among the 22 key investors in Decrypt, ConsenSys is one.) The Shanghai upgrade will enable Ethereum users worldwide to start withdrawing ETH stored on the network through its staking program starting the following month. Money worth over $27 billion is currently bet on the network.
According to Bill Hughes, ConsenSys Senior Counsel and Director of Global Regulatory Matters, securing the proper tax treatment for staking rewards is only becoming more crucial. With more liquidity in ETH staking, they anticipate that a lot more regular people will start staking.
ConsenSys will now pay for the Jarretts’ appeal of the decision to dismiss their case. The Jarretts are actively pursuing this course of action.
The core tenet of the appellants’ case is that staking rewards shouldn’t be regarded as taxable income because no employer is disbursing them. The federal tax system should instead treat them as effectively self-generated or created property.
The protocol creates staking rewards to incentivize participation in providing security for the protocol, similar to a farmer who plants crops, Hughes added. Until it is sold, created property is not taxed.
However, the fact that the majority of Ethereum’s staking rewards are produced by a third party may make that analogy more difficult. According to the data, Five such centralized firms presently hold over 80% of the ETH invested in Ethereum. Centralized cryptocurrency exchanges with large stakes include Coinbase, Binance, and Kraken.
