James Matheson (Bloomberg Law): Crypto Lawsuits Seek to Shape Tax Treatment of Newly Made Tokens

Two federal court cases are serving as the testing grounds for when certain kinds of newly created cryptocurrency become taxable income, in an area where some legal observers say regulators haven’t yet established clear rules.

The cases, Jarrett v. United States and Rogovy v. Commissioner, are brought by cryptocurrency advocates challenging the IRS’s treatment of digital asset activity. The cases could sidestep current IRS guidance, said Omri Marian, a professor at the University of California, Irvine School of Law who focuses on taxation and blockchain technology.

“What they’re pursuing is tax exemptions in places where there is no tax exemption,” Marian said. “This is not different than the oil and gas industry pushing for oil and gas subsidies through the tax code; just an industry that’s trying to generate favorable tax treatment.”

Jarrett hinges on whether staking rewards—tokens earned for validating transactions on certain blockchain networks—should be taxed when received or when sold. Cryptocurrency investors Joshua and Jessica Jarrett argue these rewards are newly created property and shouldn’t be taxed until sold, much like a farmer growing crops or an artist creating a painting being taxed upon sale, not creation. Their 2024 suit in the US District Court for the Middle District of Tennessee comes after the IRS issued guidance stating that newly created staking rewards are taxable upon creation.

Rogovy involves how to tax cryptocurrency received during a hard fork—a blockchain protocol split that creates a new token. An April trial session in US Tax Court was held to determine whether the Bitcoin adopters had dominion and control—and therefore realized income. Although a judge denied Rogovy’s motion for summary judgment, which argued the pair’s hard fork transactions weren’t income realization events under IRC Section 611, an opinion hasn’t been issued yet.