DEFI TAXATION · UPDATED FOR 2025

Is Your Staking Income Ordinary or Capital? The Jarrett Case and What Came After.

When do you owe tax on staking rewards — at receipt or at sale? The Jarrett case opened a door the IRS quickly tried to close. Here is where the law stands in 2025 and what positions remain defensible.

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The Default Rule: Notice 2014-21

The IRS first addressed digital asset taxation in Notice 2014-21, which treated cryptocurrency as property and held that miners must recognize ordinary income at the fair market value of coins on the date of receipt. Notice 2014-21 was issued before proof-of-stake protocols existed at scale, but the IRS has applied its logic to staking rewards by analogy: staking rewards are ordinary income at FMV on the date received.

Under this framework:

• Staking rewards are taxable ordinary income when received, valued at FMV on the receipt date.
• The FMV-at-receipt amount becomes the cost basis for future disposition.
• When the rewards are later sold, any gain or loss is capital gain/loss measured from the FMV-at-receipt basis.
• If the rewards are sold immediately at receipt, there is zero capital gain/loss because the basis equals the proceeds.

This treatment was not without controversy. Many commentators argued that staking rewards — unlike mining rewards — should not be taxed at receipt because they represent the validator’s compensation for providing services to a decentralized network, and the economic substance is more analogous to property creation than compensation. The Jarrett case brought this argument to federal court.

The Jarrett Case: Tenn. 2022 and the Refund the IRS Paid

In Jarrett v. United States, Joshua and Jessica Jarrett filed a refund claim for tax paid on Tezos staking rewards they received in 2019. Their argument: the new tokens created by staking were newly created property — like a farmer’s harvest or an author’s manuscript — and should not be taxed until sold. Under this theory, staking rewards are not income at receipt; they become income (or produce capital gain) only at disposition.

The U.S. District Court for the Middle District of Tennessee issued a significant order in 2022: the government, rather than litigating the merits, offered the Jarretts a full refund of the contested tax. The Jarretts refused the refund — they wanted a ruling on the merits, not just their money back — and the IRS’s decision to offer the refund rather than defend the position was widely interpreted as a concession on the legal question.

The practical implication: for several months in 2022, there was a legitimate argument that the IRS had, in effect, accepted the “new property” theory of staking rewards. Some taxpayers and advisors filed returns that deferred staking income to the date of sale, citing Jarrett.

The IRS Response: Rev. Rul. 2023-14

The IRS closed the door — at least officially — with Rev. Rul. 2023-14, issued in July 2023. The ruling addresses a specific fact pattern: a cash-method taxpayer who receives new units of cryptocurrency through proof-of-stake validation. The IRS concluded:

• The rewards must be included in gross income at FMV in the taxable year of receipt.
• The amount includible is the FMV on the date and time the taxpayer receives the rewards and has dominion and control over them.
• The FMV-at-receipt amount is the taxpayer’s basis in the received tokens.

Rev. Rul. 2023-14 explicitly did not address mining, airdrops, or hard forks. It also did not address the question of whether the Jarrett “new property” theory is legally correct — it simply stated the IRS’s administrative position. Revenue rulings bind IRS agents and represent the IRS’s interpretation of the law, but they are not statutes and they are not courts. A taxpayer who disagrees can still take a contrary position — at the cost of potential penalties if wrong.

What Positions Are Still Defensible in 2025

After Rev. Rul. 2023-14, the tax landscape for staking rewards looks like this:

The safe position (IRS-approved): Report staking rewards as ordinary income at FMV on the date of receipt. This is what Rev. Rul. 2023-14 requires. It produces the largest current-year tax bill but eliminates audit risk on the characterization question.

The Jarrett position (arguable): Defer reporting until disposition, treating staking rewards as newly created property. This position is still arguable because:

• The Jarrett case was not decided on the merits — the IRS’s refund offer does not constitute binding precedent, but it is evidence of the IRS’s uncertainty about its own position.
• Rev. Rul. 2023-14 addresses a specific factual scenario and does not have the force of a court decision or a statute.
• The Tax Court has not ruled on the question.

However, the Jarrett position carries real risk in 2025. Taking a position contrary to a revenue ruling requires adequate disclosure (generally via Form 8275) and subjects the taxpayer to a 20% accuracy-related penalty if the position fails. Unless the amount at stake is substantial and the client is willing to litigate, most practitioners recommend the Rev. Rul. 2023-14 position for 2025 returns.

A nuanced middle ground: report rewards as ordinary income per Rev. Rul. 2023-14, but document the Jarrett argument as a preserved position with a memo. This gives the client a clean return for audit purposes while preserving the legal argument if the question reaches the Tax Court or Congress acts. This is the approach Saim takes for clients who ask about staking characterization.

Documentation Requirements

Regardless of which position you take, documentation is essential:

• Date and time of receipt. Blockchain timestamps for each staking reward event. For validators receiving hundreds of micro-rewards per day, this may require protocol-level API data or a specialized accounting tool that can capture intraday pricing.
• FMV at receipt. The IRS requires FMV at the time of receipt. For staking rewards that vest continuously (like some liquid staking protocols), the FMV calculation method must be documented and applied consistently.
• Basis establishment. The FMV-at-receipt amount is the cost basis for each reward lot. This basis record must be maintained wallet-by-wallet per Rev. Proc. 2024-28.
• Protocol identification. Document which protocol generated each reward (Lido, Rocket Pool, native Ethereum staking, Cosmos delegation, etc.) because the legal character question may turn on the specific protocol mechanics.

Character on Disposition: What Happens When You Sell Staking Rewards

Assuming you reported staking rewards as ordinary income at receipt (the Rev. Rul. 2023-14 position):

• Your basis in each reward lot is the FMV on the date of receipt.
• Your holding period begins on the date of receipt.
• When you sell, the gain or loss is the difference between proceeds and the FMV-at-receipt basis.
• If you sell within one year of receipt: short-term capital gain taxed at ordinary rates.
• If you sell after one year of receipt: long-term capital gain taxed at 0% / 15% / 20% rates (plus 3.8% NIIT if applicable).

For liquid staking tokens (e.g., stETH, rETH), the analysis is more complex: the receipt of the liquid staking token may itself be a taxable exchange, and the subsequent appreciation of the token reflects both principal appreciation and accrued rewards. This area of the law is unsettled, and positions should be taken carefully and documented thoroughly.

A practical note on high-frequency stakers: if you receive dozens or hundreds of small staking reward payments per day, tracking FMV at each individual receipt can be operationally difficult. The IRS has not issued guidance on whether a reasonable approximation (e.g., end-of-day prices, or a daily average) is acceptable. In practice, most practitioners use the closing price for the reward date — a defensible, consistently-applied method that is auditable.

IRS references in this article: Notice 2014-21, Rev. Rul. 2023-14, IRC §61, IRC §1221, IRC §1(h), Form 8275, Jarrett v. United States (M.D. Tenn. 2022)