In May 2021, a Tennessee couple, Joshua Jarrett and Jessica Jarrett (Jarretts), filed a complaint with the IRS arguing that the Tezos staking rewards they earned should not be taxed upon receipt. The couple applied for a $3,793 tax refund by filing an amended tax return.
In December 2021, the US Department of Justice ordered the IRS to issue the full refund. The Jarretts refused to accept the refund because the IRS failed to acknowledge the real reason for issuing the refund. This reasoning was essential in creating a precedent for other interested parties and protecting itself from future IRS scrutiny. The Jarretts decided to take this to court to get a formal judicial decision.
In a motion to dismiss dated February 28, 2022, the US Department of Justice dismissed the Jarretts' attempt to take the case to court because the case lacks merit.
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Key concepts
Case of Joshua Jarrett, Jessica Jarrett (plaintiffs) v. USA (defendant). During 2019, a couple from Nashville (Jarrets) received 8,876 tezos (XTZ) of staking rewards. These coins had a value of $9407 at the time of receipt. The Jarretts reported $9,407 as income and paid related taxes. On July 31, 2020, the couple filed an amended tax return arguing that $9,407 of participation income should not have been income in the first place. The amended return demanded a $3,793 tax refund from the IRS. The couple did not receive a timely response from the IRS. In a complaint dated May 21, 2021, the couple argued that newly created real estate is taxed only at the time of sale, not at the time of receipt. For example, if you create a book, you pay taxes only when you sell it, not at the time you finish writing the book. In response to this complaint, the US Department of Justice's Tax Division directed the IRS to issue a refund of $3,793 in a letter dated December 20, 2021 . The Jarretts received a refund check for $4,001.83 ($3,793, plus $208.03 interest under 26 USC § 6611(a) calculated as of January 28, 2022) on February 14, 2022. Interestingly, the Jarretts refused to accept the refund because the IRS failed to acknowledge the real reason for issuing the refund. This reasoning is essential to creating a precedent for other interested parties to shield themselves from IRS scrutiny in the future. The Jarretts decided to take this to court to get a formal judicial decision.
Motion to dismiss dated February 28, 2022
In a court document dated February 28, 2022, the US Department of Justice (DOJ) Tax Davison dismissed the Jarretts' attempt to obtain an official court ruling on staking.