The U.S. Internal Revenue Service (IRS) has doubled down on its stance that crypto staking is taxable, stating that tax liabilities arise as soon as staking rewards are received, Bloomberg reported .

This comes amid an ongoing legal battle with Joshua and Jessica Jarrett, a Tennessee couple staking on the Tezos network, who argue that staking rewards should not be taxed until sold.

In a Dec. 20 court filing, the IRS rejected the Jarretts’ claim that staking generates “new property” that should only be taxed when sold. The government said that “staking a cryptocurrency should induce a tax liability as soon as it is done,” denying the notion that staking tokens fall under the same category as crops, books, or manufactured goods.

The case, now being closely watched by the crypto industry, could have significant implications for how staking rewards across all proof-of-stake blockchains are taxed in the United States.

A Battle Years in the Making

The Jarretts' legal battle against the IRS began in 2021, when they filed a lawsuit seeking a refund of $3,293 in taxes paid on 8,876 Tezos tokens earned in 2019 through staking. At the time, the tokens had not been sold or exchanged. The couple argued that since the tokens were “new property” created through their staking efforts, they should not be taxed until the assets are sold, much like “a farmer’s crop, an author’s manuscript, or a manufacturer’s product.”

In 2022, the IRS attempted to dismiss the case by issuing the Jarretts a $4,000 tax refund for income taxes paid on their Tezos rewards. However, the Jarretts refused the refund, opting to pursue the case further to set a legal precedent for all staking participants across proof-of-stake networks.

“A year and a half into this process, the government didn’t want to defend the position that the tokens I created through staking were taxable income. […] I need a better answer. So I refused the government’s offer to pay me a refund,” said Jarrett.

According to IRS guidelines released in 2023, block rewards from staking or mining are treated as taxable income at the moment they come into existence, with tax liabilities based on their market value at the time of creation.