Crypto couple tells court the IRS has no right to tax newly mined coins

A couple investing in crypto have claimed that coins gained by mining or staking are not taxable until sold, in a complaint filed to federal court. 

The Tennessee couple are seeking a refund from the Internal Revenue Service (IRS) and filed a complaint with the U.S. District Court for the Middle District of Tennessee on Tuesday, May 25.

Joshua and Jessica Jarrett claim that earnings from staking are not taxable transactions because they constitute the creation of property. They compared this to a baker making a cake or an author writing a novel.

Law360 reported that the court heard Jarrett used his resources to create 8,876 new units of Tezos (XTZ) tokens in 2019, and he has yet to sell any of them. The case is based on the premise that the crypto assets were “created” and have not been sold, so no income or profit has been realized from them.

In their complaint, the Jarretts stated that the U.S. seeks to use federal income tax law to do something unprecedented, which is tax creative activity rather than income, adding:

“Taxing newly created cakes, books or tokens as income would have far-reaching and detrimental effects on taxpayers and the U.S. economy, and is without support in the Internal Revenue Code, regulations, case law or the Constitution.”

The couple cited a 1920 Supreme Court case which held that income must involve a “coming in”. Property made by a taxpayer does not “come in”, but rather goes out, they stated. Another 1955 ruling where the court characterized income as “instances of undeniable accessions to wealth, clearly realized, and over which the taxpayers have complete dominion”, was used to back up the claim.

The couple reported the tokens as “other income” on their tax returns resulting in a payment of $9,407 to the IRS. A refund of $3,293 paid in federal income tax and a $500 increase in tax credits resulting from a reduction in their income has been requested.

The couple’s lawyer, David L. Forst, stated that there is “100 years of tax law” as a legal precedent that newly created property is not taxed.

In early March, Cointelegraph reported that the IRS clarified that crypto investors who only purchased digital assets using fiat and did not sell during 2020 do not need to report said activities.

On May 20, it was reported that the U.S. Department of the Treasury called for exchanges and custodians to report crypto transactions greater than $10,000 to the IRS.