Tezos Node Operator Files Lawsuit Against the IRS Again

Josh Jarrett, a validator node operator (baker) on the Tezos (XTZ) network, has filed a lawsuit against the IRS, The Block has reported.

A Tezos (XTZ) validator node operator has filed a lawsuit against the Internal Revenue Service (IRS) over its tax treatment of staking rewards, arguing that they should not be counted as income until they are actually sold.

Josh Jarrett, a baker on the Tezos network, filed the complaint in the U.S. Tax Court on Monday. He is seeking a refund of $12,179 in taxes paid on 13,000 Tezos, which he purchased in 2020.

“Under current law, token rewards I create through baking shouldn’t be counted as income until I actually sell them,” Jarrett said in a statement. “I purchased these tokens in 2020 and have been baking with them ever since. I’m backed by Coin Center in this case, and we’re hoping for a favorable decision that will provide clarity for the entire crypto community.”

This is the second lawsuit that Jarrett has filed against the IRS over the taxation of staking rewards. In 2021, he sued the agency over his 2019 tax bill, which also included an assessment for unpaid taxes on the rewards.

The IRS eventually gave Jarrett a $4,000 refund, but it did not address the core issue in his case. As a result, the case was dismissed earlier this year.

However, Jarrett refused the refund and asked the court to make a definitive ruling that would determine his future tax obligations for staking rewards.

“I’m not interested in a partial victory or a quick settlement,” Jarrett said in a tweet at the time. “The IRS applied the wrong tax treatment in 2020, the same as 2019, and that’s why I’m filing a second lawsuit.”

In his new lawsuit, Jarrett is attempting to get the IRS to refund him his 2020 staking rewards while also forcing the agency to issue him an injunction that would prohibit the IRS from applying the same tax treatment in the future.

“Taxing staking rewards as income the moment they’re created creates unnecessary complexity and over-taxation for individuals like me who engage in staking,” Jarrett said in his statement. “I’m hoping that this lawsuit will finally get the IRS to provide the clarity that’s needed.”

Jarrett’s latest lawsuit comes as the IRS is facing increasing pressure from Congress and the Biden administration to crack down on cryptocurrency tax evasion.

In March, the agency announced that it would be hiring an additional 87,000 employees over the next decade, with a focus on bolstering its criminal investigations division and improving its ability to audit complex tax returns.

The IRS has also been working on developing new guidance for the taxation of cryptocurrency, including staking rewards. In 2021, the agency issued a notice that clarified the tax treatment of airdrops and hard forks, but it has not yet issued any guidance on staking.

Coin Center, a non-profit organization that is supporting Jarrett’s case, said in a statement that the lawsuit will set a “critical precedent” for the taxation of staking rewards.

“This case will determine how these rewards are taxed for many other users involved in blockchain validation and staking,” the organization said. “We’re closely following this case and will provide updates to the community as they become available.”

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