Sued, IRS Intentions To Tax On New Crypto Tokens

The IRS tax collection agency is judged arbitrarily in taxing new tokens. (photo: unsplash)

JAKARTA – The tax collection agency in the United States (IRS/ Internal Revenue Service) is now continuing to expand tax regulations to suit their cryptocurrency agenda. Throughout history in the US in fact, creation has been purely a taxable event.

However, the IRS seeks to tax new tokens as revenue at the time they are created. This is a violation of traditional tax principles and is problematic for several reasons.

In 2014, the IRS stated that mining activities would generate gross taxable income. It is important to note that IRS notices are guidance only and not law. The IRS concludes that mining is a trade or business and the market value of the directly mined coins is taxed as ordinary income and subject to self-employment tax (15.3% additional).

A new lawsuit over the IRS plan is ongoing in federal court in Tennessee. Plaintiff Joshua Jarrett is betting on the Tezos blockchain.

The IRS taxes the newly created Jarrett tokens as taxable gross income based on the fair market value of the new Tezos tokens. Jarrett's attorney has rightly pointed out that newly created property, is not a taxable event.

This means that newly created Tezos tokens are only taxed when sold or exchanged. Jarrett has the support of the Proof of Stake Alliance, and the IRS has yet to respond to Jarrett's complaint.

In the United States income tax history, the newly created property has never been taxable income. If a baker bakes a cake, it is not taxed when it is removed from the oven. However, the bread is taxed when it is sold in a bakery or to someone.

When a farmer grows a new crop, it is not taxed when it is harvested. However, it is only taxed when it is sold in the market. Similarly, when a painter paints a new portrait, it is not taxed when finished. However, it will be taxed when sold in the gallery. The same goes for newly created tokens. At the time of creation, they are not taxed and are only taxed when sold or exchanged.

Cryptocurrencies are new and there is a lot of evolving terminology that goes with it. While it's common to call a newly created block of tokens a “gift”, it is wrong and can be misleading.

Calling something a gift shows that someone else is paying for it and makes it sound like taxable income. In reality, no one pays a new token to a staker. On the other hand, staking generates completely new properties.