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Crypto Staking Tax Lawsuit Ruled Moot After IRS Issued Refund

Oct. 4, 2022, 6:00 PM

A legal dispute pitting Tennessee taxpayers against the IRS over how cryptocurrency tokens are taxed has been dismissed by a Tennessee district court, because the refund sought by the taxpayers had already been issued and the dispute rendered moot.

Joshua and Jessica Jarrett initiated the closely watched lawsuit over Tezos tokens created by Joshua through the process known as staking, seeking a tax refund of nearly $4,000. The Jarretts argued that the tokens shouldn’t be taxed as income because they were newly created property. In staking, cryptocurrency holders are rewarded with additional tokens for lending their tokens and computing power to validate new crypto on a blockchain.

While the dispute concerns the 2019 tax year, the Jarretts claimed that they were entitled to a refund for all income taxes paid on the tokens. The IRS issued a refund in early 2022, and the couple rejected it. They continued to fight the issue in court, hoping to force a judicial ruling that staking gains only be considered income when new tokens are sold, as is generally the case for other forms of new property.

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The US District Court for the Middle District of Tennessee sided with the government Friday, dismissing the case as moot with the issuance of the refund. It dismissed further arguments from the Jarretts.

“The Court finds no reasonable expectation that Plaintiffs will be subject to the same action again,” according to the opinion written by District Judge William L. Campbell, Jr. “As stated above, the instant controversy was limited to whether Plaintiffs were entitled to a refund of taxes paid for the 2019 tax year. This particular issue is not capable of repetition as any subsequent claim for refund would necessarily apply to a different tax year.”

Cameron Norris of Consovoy McCarthy PLLC, representing the Jarretts, and the Justice Department didn’t immediately respond to requests for comment.

The case is Jarrett v. United States, M.D. Tenn., No. 3:21-cv-00419, 9/30/22.

To contact the reporter on this story: Jeffery Leon in Washington at jleon@bloombergindustry.com

To contact the editors responsible for this story: Rachael Daigle at rdaigle@bloombergindustry.com; David Jolly at djolly@bloombergindustry.com