XTZ Stakers Sue IRS Over ‘Wrongful Taxation’ of Their Tezos Baking Rewards

  • In Nashville, Tennessee, a couple is suing the U.S. Internal Revenue Service, or IRS, for wrongful taxation on rewards gained from baking (or staking) on the Tezos blockchain.
  • This lawsuit is set to shape how the taxman will treat the staking rewards across the country.

According to a filing sent to the U.S. District Court for the Middle District of Tennessee, the couple, Jessica and Joshua Jarret are asking the IRS to refund taxes paid on the staking rewards claiming they are untaxable before they are sold or exchanged.

In their claim, the Jarrett couple states the IRS should not have taxed them for the staking rewards as it “constitutes the creation of property.” In their lawsuit, the couple is asking for a refund of $3,293 paid in income taxes in 2019 to receive 8,876 XTZ tokens rewarded. Additionally, they ask for $500 compensation in tax credits for the income lost during this period.

Further digging into the document, the couple states that Federal income tax laws do not permit Uncle Sam to collect any taxes from staking rewards, compared to a baker making a fresh cake or an author writing a book. They claim since they have not had any proceeds from the “created tokens,” they should not be taxed on it. The document reads,

“Like a baker who bakes a cake using ingredients and an oven, or a writer who writes a book using Microsoft Word and a computer, Mr. Jarrett created a property.”

The Proof-of-Stake Alliance (POSA), an advocacy group tasked with bringing clarity in the legal sector of POS chains, shared the document claiming the lawsuit will have far-reaching consequences to proof-of-stake blockchains in the future. Speaking on the lawsuit, POSA founder Evan Weiss said,

“This is an issue of practical and economic importance. The wrong policy would drive innovation elsewhere … Fortunately, the correct policy is set under existing laws.”

With Ethereum set to transition into a proof-of-stake network in the coming year, the cryptocurrency community will be more aware of this law and report their staking rewards.

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