Prominent Tezos XTZ -0.92% “baker” Josh Jarrett has filed a new lawsuit against the Internal Revenue Service, seeking to overturn its rule that token rewards should be treated as income in the year they are earned. Washington D.C.-based think tank Coin Center is assisting him in the litigation, Communications Director Neeraj K. Agrawal wrote in a blog post. 

Jarrett’s new case, filed Thursday, aims to create a permanent injunction against “treating tokens created by the Jarretts as income.” He and his co-plaintiff and spouse, Jessica Jarrett, are also seeking a $12,179 refund for taxes paid on 13,000 Tezos tokens earned in 2020.

This legal action follows a prior lawsuit against the IRS. In 2021, Jarrett argued that 8,876 Tezos tokens earned as staking rewards in 2019 should be treated as property, not income, meaning they should be taxed at the time of sale rather than when they are accrued. Although Jarrett did not sell or exchange those tokens that year, he paid the assumed tax bill and then filed a refund suit, citing tax codes 7421 and 7422.

In 2022, the IRS sought to dismiss the case, which could have set a legal precedent for all proof-of-stake chains, by offering Jarrett a $4,000 tax refund for income taxes paid on his Tezos staking rewards. Jarrett declined the refund to continue pursuing his case in court, which was supported by several pro-crypto organizations, including the Proof of Stake Alliance and Coin Center.

However, in September 2024, a Sixth Circuit court dismissed the case. The IRS argued that it had issued a full $4,001.83 refund and conceded that Jarrett was not liable for tax on his 2019 staking rewards, rendering the case "moot." This decision contradicts the IRS policy implemented in 2023, which mandates that token rewards are treated as income when earned.

“In all other contexts, the IRS recognizes that new property is not taxable income. When a taxpayer creates new property—whether a farmer’s crop, an author’s manuscript, or a manufacturer’s product—he is not taxed until he sells it,” Jarrett’s latest lawsuit states. 

Coin Center, which filed an amicus brief in Jarrett’s original case, argues that federal tax laws treating staking returns as revenue could discourage participation in decentralized networks. “We believe that taxpayers like Josh have the right to have a court decide what the law is, not an unaccountable agency,” Agrawal wrote.

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