This new lawsuit was filed in Tennessee federal court on October 10. The Jarretts object to the IRS’s approach to taxing the tokens they earned through staking.

The couple argues that tokens created through staking should be considered property and that these tokens should be taxed only at the time of sale. According to them, these tokens are a “new property” that did not belong to anyone before.

The Jarretts compare this situation to a farmer’s crop, a writer’s manuscript, or a manufacturer’s product. According to this argument, no income is generated until the sale of these new properties and therefore they do not need to be taxed.

“New property is not taxable income; taxable income arises from the proceeds of the sale of this new property,” they noted. They also argued that in all other contexts the IRS has deemed new property not taxable income.

According to the IRS’s guidance for 2023, block rewards such as staking are considered “income” as soon as they are created, at which time taxes must be paid based on the market value of the tokens.

This situation forms the basis of the Jarretts’ legal fight. They do not want staking rewards to be taxed immediately, but only count as income at the time of sale.

In their lawsuit, the Jarretts seek a finding that their previous federal income taxes were misassessed, a refund of $12,179 in taxes paid on 13,000 Tezos tokens they earned in the 2020 tax year, and an injunction that would permanently prevent the IRS from recognizing the tokens they created as income.

In this legal fight, Washington DC-based think tank Coin Center supports the Jarrett couple. Coin Center stated that they oppose interpretations of tax laws that could prevent the use of cryptocurrencies and permissionless technologies.

In their Oct. 9 statement, they stated that they support this lawsuit because tax laws and federal agencies’ interpretation of those laws have the potential to deter Americans from using cryptocurrencies.

Coin Center also stated that there needs to be some changes to the tax laws, which is why they are advocating for legislative changes such as the Virtual Currency Tax Fairness Act, which would provide an exemption for small personal crypto transactions.

The Jarretts’ legal battle with the IRS began in 2021. In 2019, they paid $9,407 in taxes to the IRS on 8,876 Tezos tokens they earned as staking rewards.

Even though they did not sell or exchange these tokens, they had to pay the IRS’s default tax bill. They later filed suit, seeking a $3,293 tax refund and a $500 tax credit increase based on a reduction in their income.

In 2022, the IRS offered the Jarretts a $4,000 tax refund for income taxes paid from Tezos staking rewards. Following this offer, the lawsuit filed in the Tennessee District Court was dismissed. However, the Jarretts rejected this offer because they wanted to take the case to court and set a legal precedent for all proof-of-stake chains.

The IRS argued that the case was “non-issue,” stating that the Jarretts acknowledged that they did not owe taxes on the 2019 staking rewards and issued a full refund of $4,000. Prior to this latest lawsuit, the Jarretts attempted to reopen their original case through appeal but were unsuccessful.

This new case could renegotiate the IRS’s policy regarding the taxation of staking rewards and have far-reaching legal implications for the taxation of crypto assets. By winning this case, the Jarretts aim to set a precedent for both themselves and the crypto world.