Congress Tackles Cryptocurrency Tax Reform Amid Staking and Mining Complexity
Congress is working to reform tax laws for digital assets like cryptocurrency. Since 2014, the IRS has issued notices on how to tax cryptocurrencies, but legislators have not agreed on whether staking and mining rewards should be taxed as self-created property or compensation.
The novelty of blockchain technology makes it difficult to categorize these transactions in existing law. Staking, used in Proof-of-Stake blockchains, involves locking tokens into the blockchain for rewards that come in the form of newly formed additional cryptocurrency. Mining, used in Proof-of-Work blockchains, also yields new cryptocurrency through solving complex problems.
The Tax Court recently issued a decision in Paschall v. Commissioner, which declared staking rewards taxable. However, another case, Jarrett v. United States, came to an opaque result after the IRS provided a refund for taxes paid on staking rewards.