A potential watershed case before the IRS could set an important precedent impacting how passive income from holding crypto will be taxed moving forward.
According to this notice, mining income should be reported on your taxes at the time you receive the rewards. When you sell those mined coins, another taxable event is triggered.January 1, 2021 – 1 XTZ valued at $10His total ordinary income from staking operation for the 2021 tax year would be $25.
Assume he sells 1 XTZ received on January 1, 2021, for $15 in March 2021. This would also create a capital gain of $5 . In 2021, his total income subject to taxes would be $30 .Staking results in a creation of “new property”. New property is taxed only at the time of sale, not when you discover it.
Also, it is very important to know that the outcome of this case will not completely shield staked coins from taxation. Staking income is taxed at the time of receipt; it will be taxed only at the time of sale. For example, say Sam received 1 ADA staking reward worth $2 in 2022. Sam does not have any taxable income at the time he receives the token. The cost basis of the ADA token will be zero. If Sam later sells this coin for $10, he will have to report $10 of income.
The Jarretts' judgement could also lead to many taxpayers amending their previous tax returns with staking income. You can file a Form 1040-X to amend your previous tax returns where you reported staking income when you received it. The IRS gives taxpayers three years from the date the original return was filed to file an amended return and request a refund. Consult your tax adviser to see if you are eligible to amend your tax returns and potential pros and cons.
Finally, this favorable tax treatment could accelerate the growth of Proof-of-Stake based cryptocurrency projects. Contact your tax adviser to see if you are qualified to amend your previous tax returns with staking income.
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