Our Blog

How is Crypto Staking Taxed Post Jarrett?

How is Crypto Staking Taxed Post Jarrett?

By Anthony Diosdi

In 2021, a Tennessee couple filed suit in federal district court in Tennessee seeking the refund of the federal income tax they paid on certain newly issued Tazos cryptocurrency units they acquired in 2019. See Jarrett v. United States, No. 3:21-cv-00419 (M.D. Tenn. 2021)(May 26, 2021). The cryptocurrency units at issue were the rewards the couple had received for their “staking” activities on Tezos blockchain network. Rather than contest the matter, the Internal Revenue Service (“IRS”) refunded the tax paid by the couple. As a result, the court dismissed the case, depriving the cryptocurrency market of needed clarification in this area. This article discusses the current state of the taxation of crypto staking and how investors can calculate their basis in the block rewards from staking.

An Overview of Crypto Staking

Both the proof-of-work (“PoW”) protocols used in crypto mining and the proof-of-stakes (“PoS”) protocols used in crypto staking involve the selection of a “node” operator in the network who validates new transactions, adds them as a block to the blockchain and, in return, receives the units awarded for that block. These units given to the selected participant are newly issued cryptocurrency units, which are added to the ones already in circulation. They serve to incentivize node operators to validate transactions and to take part in the applicable consensus algorithm that ensures the integrity of the network’s publicly distributed ledger.

The PoW and PoS protocols differ significantly in how participants get selected to perform these functions. Under PoW protocols, the first participant or “miner” that solves the computational problem for the new block obtains the right to add that block and receive the block’s reward units. In contrast, under PoS protocols, the participant or “validator” that adds a new block and receives its reward units is selected from a pool of participants, each of whom has put up its own units as security for the right to be the validator. The precise mechanism by which validators are selected under the PoS protocols varies from protocol to protocol, but each prospective validator’s stake size and staking history typically factor into the selection process.

In addition to the block rewards mentioned above, miners and validators are entitled to the transaction fees associated with all transactions in a block. Cryptocurrency users wishing to expedite the entry of their transactions into the blockchain often include these fees, or add to any base transaction fees already being charged, in order to incentivize miners and validators to prioritize their transactions. Unlike the newly issued units included in block rewards, transaction fees are paid to miners and validators with units already in circulation. Most cryptocurrencies charge their users a base transaction fee.

Less widely adopted than mining, staking consumes far less energy. Mining is primarily a race among miners to see who succeeds in solving the computational problem the fastest. As such, mining tends to favor those participants who can bring the most computing power to bear to the task. This has led to the creation of massive mining farms filled with customized circuits or graphics processing units (“GPUs”) operating 24 hours a day, seven days a week. It has been estimated that, as of August 2022, the annual amount of electricity used by individual countries, such as Argentina or Australia was less than the annual amount used for crypto operations worldwide, with the bulk of the crypto usage being devoted to mining. See Report of White House Office of Science and Technology Policy, September 8, 2022. Ethereum, the world’s second largest cryptocurrency by market capitalization behind Bitcoin, switched from a PoW protocol to a PoS protocol in late 2022, in part out of a desire to be more energy efficient. Aside from Etherum and Tezos, other cryptocurrencies that currently use a PoS protocol include Cardano, Solana, Toncoin, and Algorand.

The Tax Controversy Regarding Staking

In Jarrett v. United States, the Jarretts paid federal income tax attributable to the newly issued reward units that Mr. Jarrett received in 2019. Mr. Jarrett received these reward units as a validator on the Tezos blockchain network where, after having staking his own Tezos units as security, he used his computing power to validate new transactions, adding them to existing Tezos blockchain as new blocks. Shortly after paying the income tax, the Jarretts filed an amended tax return seeking a refund of the tax they had previously paid. Receiving no response from the IRS after almost a year, the Jarretts filed suit for the requested refund.

In their lawsuit, the Jarrets specifically challenged the position taken by the IRS in Notice 2014-21 with respect to mining rewards. As a general matter, the notice classified cryptocurrencies for federal tax purposes as property, with general tax principles applying. But in the answer to Q-8 of the FAQs in the notice, the IRS took the position that “when a taxpayer successfully ‘mines’ virtual currency, the fair market value of the virtual currency as of the date of receipt is includible in gross income.” The notice makes no mention of staking, although, admittedly, few virtual currencies at the time employed PoP protocols. The IRS subsequently published an expanded set of FAQs in 2019, but again no mention of staking was made. In the absence of any express guidance on staking, the guidance on mining in Notice 2014-21 has been interpreted to apply to staking as well.

The complaint filed by the Jarretts focused on the fact that the reward units were items of property created by Mr. Jarrett. He created them while engaged in his staking enterprise of creating new blocks of validation transactions for the Tezos blockchain. The reward units did not exist prior to their creation by Mr. Jarrett, and at no time did anyone pay them to him. According to the compliant, Mr. Jarrett, in creating the reward units through the use of his computing power, is comparable to a baker who bakes a cake using ingredients and an oven, or a writer who writes a book using Microsoft Word and a computer. The same principle that forecloses treatment of the cake as income when the baker finishes baking it, and the book as income when the writer finishes writing it, equally applies to the reward units when Mr. Jarrett created them.

The Jarretts cited Eisner v. Macomber, 252 U.S. 189 (1920) and Commissioner v. Glenshaw Glass, 348 U.S. 426 (1955), two well established Supreme Court decisions in support of two arguments that they made. First, created properties, such as the cake, the book, and the reward units, are not income to their creators upon their creation because they are not “coming in” to their creators. Second, created properties do not become income until they have gone “ot” from their creators and the creators have “clearly realized” accessions to wealth. In the instant case, neither of the two events in the second argument occurred with respect to the reward units in question. Mr. Jarrett had kept all of these units in his digital wallet throughout 2019 and never sold or exchanged them.

It should be noted that the relief requested in the Jarreets’ compliant pertained solely to the newly issued reward units. The complaint is silent about any transaction fees that Mr. Jarrett may have received as a Tezos validator, and does not seek a refund of any tax attributable to such fees. Since transaction fees are paid with existing units already in circulation, none of the Jarretts’ arguments with respect to the newly issued reward units would have applied. The fair market value of units received as payment of transaction fees would be treated as gross income as of their date of receipt by Mr. Jarrett and may be subject to self-employment tax.

The IRS elected not to allow a court to reach a decision regarding this argument and instead refunded in full the tax attributable to the unit rewards (plus interest). Since the district court did not rule on the taxation of rewards from staking, there are questions about what the Jarrett case actually means for other cryptocurrency investors. Even though the case does not provide legal precedent that can be relied on by investors, it may provide some insight as to how staking transactions should be treated for income tax purposes. The two Supreme Court cases cited by the Jerretts offer support for an argument that reward units from a staking transaction are not income until the validator sells or exchanges them. This presupposes, however, that reward units can be successfully characterized as items of property created by the validator. Until the IRS issues a clarifying statement to explain how the creation argument applies to distinct activities related to staking rewards, crypto traders will have no government guidance about the tax treatment of staking activities.

The Jarrett case may even call into question the IRS position in Notice 2014-21 that explicitly addresses mining rewards. Just like the rewards for staking, the rewards for mining are newly issued units that come into existence when the miner adds the validated transactions to the blockchain. But, an argument that mining rewards are also created items of property may be harder one to make, as compared with staking rewards. Validators who receive staking rewards are generally stakeholders in the network with “skin in the game.” As such, validators are more closely connected economically with the very network under which the rewards arise. In contrast, miners do not have such an economic connection to the network. They have not put up their own units as security for the right to be the successful miner. As such, miners are more like independent contractors hired by the network to validate transactions in exchange for mining rewards. In this case, mining rewards appear more like compensation miners receive for services. It is unknown at this time whether any miners have sought to make this or similar arguments to the IRS that mining rewards are creations and are not income as of the date of their receipt.

Determining the Tax Basis in Staking Rewards

Regardless of the controversy discussed above, crypto investors will need to know the cost basis of their transactions in order to accurately determine their tax liability and submit correct tax returns. In the simplest of terms, the cost basis for staking rewards amounts to the market value on the date the investor received the staking rewards. Some of the larger exchanges may have the cost basis of your staking rewards readily available to you. For example, investors staking on an exchange like Binance, Kraken, or Koinly can import and tag his or her staking rewards automatically on an IRS Form 8949. When this is not an option, an investor may need to use another price-tracking website such as coingecko to manually retrieve the value of the units as of the dates on which the staking rewards were received.


The taxation of staking rewards received by crypto investors remains incertain. Investors receiving staking rewards are operating in uncharted tax waters. Traders receiving staking rewards should consult with a qualified tax attorney to determine how to best proceed with reporting their staking rewards to the IRS or if they may qualify for a refund of taxes paid on staking rewards. 

Anthony Diosdi is one of several tax attorneys and international tax attorneys at Diosdi Ching & Liu, LLP. Anthony focuses his practice on domestic and international tax planning for multinational companies, closely held businesses, and individuals. Anthony has written numerous articles on international tax planning and frequently provides continuing educational programs to other tax professionals.

He has assisted companies with a number of international tax issues, including Subpart F, GILTI, and FDII planning, foreign tax credit planning, and tax-efficient cash repatriation strategies. Anthony also regularly advises foreign individuals on tax efficient mechanisms for doing business in the United States, investing in U.S. real estate, and pre-immigration planning. Anthony is a member of the California and Florida bars. He can be reached at 415-318-3990 or adiosdi@sftaxcounsel.com.

This article is not legal or tax advice. If you are in need of legal or tax advice, you should immediately consult a licensed attorney.