ConsenSys Backs Lawsuit Against IRS For Taxing Staked Crypto

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On Tuesday, ConsenSys announced that it would offer financial support to an ongoing lawsuit against the IRS for its ability to tax crypto staking rewards.

The lawsuit had been filed by Jessica and Joshua Jarrett in 2021 for recovering the federal income taxes that had been levied on the stake-generated Tezos of the Tennessee couple.

The lawsuit

The couple has argued that staking rewards that are self-generated cannot be classified as taxable income under federal law.

Halfway through the lawsuit, the IRS was willing to issue the requested refunds to the Jarretts, but the plaintiffs opted to continue with it because they want the court to provide assurance that it wouldn’t happen again.

However, no such assurance had come, as the lawsuit had been dismissed by a federal judge in October, as the couple’s grievances were deemed moot since a tax refund had been issued.

Many had been hoping that the case in question would provide millions of crypto users who use proof-of-stake blockchains for generating crypto on a daily basis some much-needed legal clarity.

The most popular of these networks is none other than Ethereum.

Staked crypto

The mechanism used by these networks encourages users to stake their crypto for validating on-chain transactions.

As users have to put up their staked funds for a long period of time, they work on accumulating currency that is newly generated.

Therefore, it does not come as a surprise that the legal journey of the Jarretts has been monitored by ConsenSys so closely.

Joe Lubin, Ethereum’s co-founder had started the blockchain tech firm. The Shanghai upgrade, which is scheduled for the next month, will allow users to start withdrawing their staked ETH that had been with the network.

The Ethereum network currently has a total of $27 billion stake in the form of ETH tokens.

Legal clarity

The Director of Global Regulatory Matters and General Counsel of ConsenSys, Bill Hughes said that since ETH staking will see higher liquidity, there will be a greater number of people who start staking.

This means that it is even more important to learn about the appropriate tax treatment for dealing with staking rewards.

The Jarretts have already begun the process of appealing for the dismissal of their case and the crypto software giant will now provide them with financial support to do so.

The primary argument that has been presented is that no taxes should apply to staking rewards because there is no employer.

Therefore, these should be considered self-generated under the federal tax code, or categorized as ‘created property’.

Hughes said that just like a farmer growing crops, the protocol creates staking rewards for giving incentives in order to provide security for the protocol.

He said that created property cannot be taxed until it is sold. But, the problem with this analogy is that a third party generates the most staking rewards on the Ethereum network.

Centralized crypto exchanges, such as Binance, Coinbase, and Kraken stake the ETH of their users on their behalf.

The case is now heading to a federal appellate court for the judges to decide if it should be reconsidered.


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