How Does the Joshua Jarrett Case Impact Crypto Staking Taxes?

The Joshua Jarrett case has drawn attention in the crypto community for its potential impact on how staking rewards are taxed in the U.S. Jarrett argued that newly created tokens should not be taxed until they are sold rather than when they are received. This dispute highlights ongoing uncertainty in cryptocurrency tax treatment.

With no clear IRS guidance on staking rewards, cases like this could shape future tax policies and enforcement. Understanding how staking gains are classified, when they are recognized as income, and what recordkeeping is required can help taxpayers comply with their obligations.

Classification of Staking Gains

Staking rewards are taxable, but classification depends on the nature of the activity. The IRS has not issued specific guidance, but existing tax principles suggest rewards could be treated as either ordinary income or property. If classified as income, they are taxed at the recipient’s marginal tax rate, which in 2024 ranges from 10% to 37% for individuals. If treated as property, tax implications could align with capital gains rules, potentially offering more favorable treatment upon sale.

The distinction often depends on whether staking is an active business or a passive investment. If staking is part of a business, rewards may be subject to self-employment tax, which is 15.3% in 2024. If staking is done as an individual investor without regular business activity, rewards may be taxed as miscellaneous income, avoiding self-employment tax but still subject to federal and state income taxes.

Timing of Recognition

Staking rewards are recognized as taxable income when the taxpayer gains control over the tokens. The IRS applies the concept of “dominion and control,” meaning income is recognized when the recipient can sell, transfer, or use the tokens. If rewards are automatically deposited into a wallet and can be accessed, they are taxable at that moment, even if the taxpayer does not sell them.

The method of distribution affects recognition. If rewards are credited to an exchange account with withdrawal restrictions, taxation may be deferred until access is granted. For example, if a staking program imposes a waiting period before rewards can be transferred, the taxable event may not occur until those restrictions are lifted.

Taxpayers in staking pools or third-party staking services must consider when they actually receive control over their rewards. If a staking provider holds the tokens and distributes them periodically, the tax obligation generally arises when the tokens are credited to the individual’s account rather than when they are generated. This timing difference can impact tax planning, especially if rewards are received near year-end, potentially shifting tax liability to the following year.

Calculation of Tax Basis

The tax basis of staking rewards determines the taxable gain or loss when tokens are sold or exchanged. Basis is typically the fair market value (FMV) of tokens at the time they are received. Since cryptocurrency prices fluctuate, accurately determining this value requires referencing real-time market data from a reliable exchange or price index. If tokens are distributed through a protocol without a readily available market price, taxpayers may need to use an average of prices across multiple exchanges or a third-party valuation service.

Tracking basis across multiple transactions is essential, especially for frequent reward recipients. The IRS allows different cost basis methods, including First-In, First-Out (FIFO), Specific Identification, and Last-In, First-Out (LIFO). FIFO generally results in higher taxable gains in rising markets since older, lower-cost tokens are sold first, while LIFO can defer some tax liability by selling newer, higher-cost tokens first. Specific Identification provides flexibility but requires meticulous recordkeeping to match each sale with its acquisition cost.

Filing Requirements

Staking rewards must be reported as gross income. The specific tax form depends on how the rewards are earned and the taxpayer’s filing status. Most individuals report staking income on Schedule 1 (Form 1040) under “Other Income,” while those staking as part of a business use Schedule C (Form 1040) to account for income and expenses. If staking rewards are earned through an entity, reporting follows the entity’s structure, potentially requiring Forms 1065, 1120, or 1120S.

If staking qualifies as a business, additional filings such as Schedule SE (Form 1040) apply, imposing a 15.3% self-employment tax on net earnings. Those receiving staking rewards as cryptocurrency payments from an employer or as independent contractors may also be subject to 1099 reporting if payments exceed $600 from a single payer, though this is more common for mining and service-related crypto income.

Recordkeeping for Staking

Accurate records are essential for taxpayers engaged in staking. Given cryptocurrency’s decentralized nature, individuals must track their staking rewards, including the date received, fair market value at receipt, and any subsequent transfers or sales. Incomplete records can lead to misreported income and potential penalties.

Crypto tax software or spreadsheets can simplify recordkeeping by pulling transaction data from blockchain explorers or exchanges. Many staking platforms do not provide detailed tax reports, requiring manual reconciliation. Taxpayers should retain records of wallet addresses, transaction IDs, staking agreements, and historical price data to substantiate reported income.

Handling Adjustments from Tax Authorities

If the IRS or state tax agencies challenge a taxpayer’s staking income reporting, reviewing transaction records and comparing them with the agency’s assessment is the first step. Taxpayers may receive a notice proposing additional tax liability due to unreported staking rewards or valuation discrepancies.

Those who disagree with an IRS determination can request reconsideration, file an appeal, or seek relief through the U.S. Tax Court. If the dispute involves classification or timing of staking income, referencing past cases like Joshua Jarrett’s and citing relevant tax principles can strengthen the argument. Taxpayers should also be aware of potential penalties for underreporting income, which can range from accuracy-related penalties of 20% of the understated tax to more severe consequences for intentional misreporting.