The crypto industry and government are engaging one another in various courtrooms to gain an advantage on unresolved crypto tax questions like forks and staking. In this issue, we spotlight an early Bitcoin investor challenging a roughly $29.4 million deficiency notice related to Bitcoin hard forks, and the Jarretts, who are Bitcoin investors whose first court case was dismissed and who are now back in court arguing that crypto staking rewards should not be included in gross income until sold.

In November, Benjamin Rogovy and Carol Castellon Miranda petitioned the Tax Court to challenge a roughly $29.4 million deficiency notice stemming from Bitcoin hard forks. Their petition claimed that Rogovy owned Bitcoin in 2017 and 2018 when the cryptocurrency underwent nine hard forks. Generally, a Bitcoin “hard fork” occurs when a coin splits into two: the original coin and a new offshoot coin.  According to IRS guidance, a hard fork may result in taxable income when the taxpayer has dominion and control over the “new” coin (which we discussed here, here and here). The petition stated that Bitcoin holders during the 2017 and 2018 hard forks had to take specific actions to gain dominion and control over any newly-created coins. The petition alleged that Rogovy did not take the required steps to retrieve certain of the coins and that the IRS wrongly concluded that he exercised dominion and control over (and determined income from) nine separate Bitcoin hard forks.

In October, Joshua and Jessica Jarrett filed a complaint, asserting that their crypto staking rewards from 2020 should not be taxable upon receipt. The complaint echoed their earlier case regarding rewards they received in 2019 (which we discussed here, here and here). Because the IRS granted the Jarretts a refund, the earlier case was not argued on its merits, and the case was dismissed as moot. According to later IRS guidance, taxpayers who stake cryptocurrency and receive rewards must include the fair market value of those rewards in gross income upon receipt (which we discussed here). In the present case, however, the Jarretts argue that creating new tokens through staking is not taxable income upon receipt; rather, taxable income arises only upon the sale of those tokens. They point out that, in another context, the IRS recognizes this principle: “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.” Additionally, the Jarretts contend that the receipt of the tokens at issue did not represent “economic gain”—which they argue is a prerequisite for taxable income, citing Moore (which we discussed here, here, here, here and here)—because the creation of the new tokens diluted the value of the existing ones. Coin Center issued a statement supporting the Jarretts’ position in their new case. The IRS may again grant the refund and seek a better venue for litigating this issue.

These cases represent a push by the crypto industry and taxpayers to utilize the courts to resolve some tough crypto tax questions. They also underscore the complexities of crypto taxation and highlight the importance of taxpayers consulting with tax advisors to navigate the intricacies of crypto ownership.