TL; DR Failure
- PoS validators rejected the IRS rebate offer and instead called for a clear pledge tax policy.
- Tezos validators sued the Federal Tax Administration last May.
The American couple from Nashville, Tennessee, who sued the federal tax agency over Tezos' (XTZ) equity award tax, decided to forgo their legal victory. Instead, Joshua and Jessica Jarret chose to fight differently in court, which led to legislative reform.
The IRS and the Nashville couple
Late last May, a married couple in Nashville, Tennessee, filed a lawsuit against the IRS. regarding a dispute over the taxation of Tezos blockchain pledge rewards.
Joshua and Jessica Jarrett requested a refund of income tax expense totaling $3,293 for 8,876 Tezos tokens. In addition, the Jarretts are requesting an additional $500 tax credit for lost income.
The couple's lawsuit is the first major lawsuit against the IRS over cryptocurrency pledge rewards. The Jarretts were taxed prior to the sale or exchange of tezos tokens. In the United States, federal income tax rules do not allow for taxation of pledge operations.
As of that time, the IRS had not provided clear instructions on the taxation of cryptocurrency assets when pledges are involved. Jarretts continued to file for refunds, which the IRS ignored.
IRS refunds against explicit equity tax policy
The crux of the litigation today is whether the pledged award is considered taxable income or created property. The latter was not taxable until the sale. On February 3, Joshua Jarrett announced that as part of the settlement, the U.S. government has agreed to refund the taxes in question.
Once an agreement was reached, the U.S. government would cover the tax refund, which appeared to be a victory for the Jarrett's. However, Joshua later discovered that there was nothing to prevent the tax department from taxing his pledge award a second time without a court order.
An IRS refund will be the ultimate outcome. However, Jarrett's statement indicates that his ultimate goal is for the IRS to clarify its position on pledge and block incentive taxes. The clarification is directed at proof-of-stake and proof-of-work systems.
To date, the federal tax agencies have not provided clear tax direction on the tax status of pledged awards. Therefore, without clear guidelines, investors cannot be assured that their income will not be taxed.
According to Reid Yager, a former POSA employee, the IRS and DOJ's decision to offer refunds without taking action to address bad policies puts U.S. companies and innovation at risk.
Finally, future court decisions on whether Staking rewards are taxable income will have a significant impact on the PoS business.