The Internal Revenue Service has long maintained that cryptocurrency staking rewards constitute taxable income at the moment of receipt — a position that treats the creation of new tokens the same way it treats a paycheck or a dividend. A growing coalition of crypto holders, backed by industry money and a favorable 2024 court ruling, is now arguing that this framework is fundamentally wrong.

The dispute centers on a deceptively simple question: when you validate transactions on a proof-of-stake blockchain and receive newly minted tokens as compensation, have you received income, or have you created property? The distinction matters enormously. If staking rewards are income, holders owe taxes immediately at the token's fair market value. If they're newly created property — like a farmer's crops or an author's manuscript — they should only be taxed when sold.

The Nashville precedent

Joshua and Jessica Jarrett, Tennessee residents who staked tokens on the Tezos network, won a partial victory against the IRS in 2024 when a federal court ruled in their favor on the property-creation theory. Rather than appeal, the IRS refunded the Jarretts' contested taxes — a tactical retreat that avoided setting binding precedent while leaving the agency's broader position intact.

The Jarretts have since filed a new lawsuit seeking a declaratory judgment that would establish their legal theory more permanently. Coinbase, which operates the largest U.S. staking service, has thrown its weight behind the effort, funding litigation and rallying affected users. The exchange estimates that millions of Americans now earn staking rewards, making the tax treatment a mass-market concern rather than a niche technical dispute.

Why the IRS is dug in

The government's resistance isn't merely bureaucratic stubbornness. Treating staking rewards as immediately taxable income captures revenue at the point of creation, when tokens often have measurable market value. The property-creation alternative would defer taxation indefinitely — potentially forever if holders never sell — creating what Treasury officials view as an unacceptable loophole.

There's also a classification problem. Proof-of-stake validation isn't quite like farming or writing; validators don't create tokens from nothing but rather earn them by locking up existing capital and performing network services. The IRS has argued this looks more like compensation for services rendered than like the creation of new property, even if no traditional employer-employee relationship exists.

The industry's broader bet

Crypto lobbyists see the staking tax fight as a wedge issue that could reshape digital asset taxation more broadly. If courts accept that blockchain-native rewards are created property rather than received income, similar arguments could extend to mining rewards, airdropped tokens, and even certain DeFi yield mechanisms. The potential revenue implications run into billions of dollars annually.

For now, the legal battle remains in its early stages, with no Supreme Court ruling on the horizon and the IRS showing little appetite for the kind of definitive guidance that would settle the matter administratively. Coinbase and its allies are betting that sustained litigation pressure, combined with a crypto-friendlier Congress, will eventually force a resolution in their favor.

Our take

The Jarretts have a point: taxing someone on property they created, at a value determined by a volatile market they don't control, before they've realized any actual gain, offends basic intuitions about fairness. But the IRS also has a point: staking rewards aren't conjured from thin air but earned through capital commitment and network participation. The honest answer is that crypto doesn't fit neatly into tax categories designed for a pre-digital economy. Congress should write new rules rather than leaving courts to shoehorn blockchain economics into 20th-century frameworks. Until then, expect this fight to grind on — and expect your staking rewards to remain a tax headache.