When Jarrett v. United States first surfaced in 2021, few realized it would become the symbolic test case for how digital asset creation should be taxed in the proof-of-stake era. The Jarretts, who staked Tezos and received new tokens as rewards, argued that these tokens were newly created property, not income, akin to crops growing in a field or ore pulled from the ground. The Internal Revenue Service disagreed, insisting that the tokens’ fair market value at receipt constituted taxable income under §61 of the Internal Revenue Code.
Though the IRS ultimately refunded the Jarretts in 2022 without conceding the issue, the case remains the central fault line in crypto taxation: Should staking rewards be taxed when created, or only when sold?
The IRS Position: Dominion, Control, and Consistency
The IRS’s interpretation, later reinforced in Revenue Ruling 2023-14, rests on the long-standing test of dominion and control. Under Commissioner v. Glenshaw Glass Co. (1955), income becomes taxable when a taxpayer has both undeniable accessions to wealth and complete dominion and control over it.
From the IRS’s perspective, staking rewards meet that standard. Once new tokens are credited to a wallet, the taxpayer can, in principle, transfer, exchange, or otherwise benefit from them. Therefore, they represent realized economic gain, just like mining rewards, interest, or rental income. Taxing at the time of receipt, the IRS argues, ensures parity across income sources and prevents indefinite deferral.
This view reflects a doctrine of consistency: mined Bitcoin, yield-farmed tokens, and staking rewards all enter the taxpayer’s control as a result of economic activity and thus fall within gross income. It also aligns with the practical concern of enforceability: if tax is deferred until sale, the IRS loses visibility and timing control, particularly in self-custodied environments with no centralized reporting.
The Counterargument: Creation, Not Compensation
The Jarretts’ argument, echoed by academics, the Proof of Stake Alliance (POSA), and several policy think tanks, hinges on the idea that staking rewards are self-generated assets, not payments. No one is compensating the validator; rather, the network protocol itself mints new tokens as part of consensus maintenance.
Under that logic, staking is analogous to a productive activity that creates new property. Just as farmers are not taxed when crops sprout, and artists are not taxed when they paint a canvas, validators should not be taxed until their token is sold. The realization principle, a cornerstone of U.S. tax law, holds that value is taxed when it is realized in a transaction providing liquidity and a verifiable price.
Critics of the IRS rule argue that taxing at creation breaks this principle, leading to “phantom income” (income taxed before liquidity or price certainty exists). On networks like Ethereum, where tokens can fluctuate 30–40% within months and often cannot be withdrawn immediately, that mismatch can produce severe distortions. Validators may face tax bills on values that later vanish, discouraging participation and forcing premature sales to cover liabilities.
The Overlooked Factor: Liquidity, Lock-Ups, and Restaking
A single “staking” label conceals a wide range of arrangements. Each with distinct implications for dominion and control.
Locked or illiquid staking. Many validators must endure an “unbonding” or lock-up period. During that time, rewards are visible on-chain but not withdrawable. If tokens cannot be transferred, does the taxpayer really possess dominion and control?
Restaked or automatically compounded rewards. Some networks and third-party protocols immediately re-stake rewards, meaning the validator never gains separate custody of the newly issued tokens. They are rolled back into the validator’s position. In those cases, the taxpayer’s “receipt” is theoretical. No liquidity event occurs, and access may be technically restricted for security or yield reasons.
Liquid or immediately withdrawable staking. Conversely, certain services (like Coinbase or Lido) allow near-instant withdrawal or issuance of derivative tokens (e.g., stETH, mSOL) that can be freely traded. Here, liquidity and dominion arguably do exist, even if through a derivative layer, strengthening the IRS’s argument for taxation upon receipt.
This variation reveals how complicated it can get. The same Ethereum reward could be taxable for one user but illiquid for another, depending on how and where staking occurs.
Active vs. Passive Staking
The distinction between active and passive staking adds another layer.
Active staking involves operating validator nodes, bearing technical and operational risk, and directly engaging with the network. These participants arguably “produce” new tokens through their own activity, resembling miners or entrepreneurs. For them, rewards could be treated as self-created property or business income, depending on structure.
Passive staking through centralized exchanges or custodial services (e.g., Kraken, Coinbase) is different. Users delegate tokens and simply receive periodic payouts. In such cases, the reward is more like interest or yield, an economic return on capital rather than self-created property. For these users, the IRS’s income-at-receipt rule may be easier to justify, since a third party effectively intermediates the earning process.
Enforcement vs. Economic Value
The practical challenge is balancing enforcement efficiency against economic neutrality. The IRS can piggy-back on observable blockchain events and avoid tracing later sales. It limits deferral risk and makes compliance automatic for custodial services issuing Form 1099s. But this administrative convenience may come at a macro-economic cost.
Under current guidance, each staking event (potentially thousands per year) constitutes a taxable micro-transaction requiring timestamped fair-market valuations. For individual validators, that means hundreds of pages of records, ill-timed tax liabilities, and liquidity strain. The compliance cost often outweighs the actual income.
Economically, this friction discourages domestic validation, drives small operators offshore, and concentrates power in large custodians who can absorb compliance burdens. In effect, the current rule may reduce U.S. participation in network security, undermining innovation, investment, and competitiveness in blockchain infrastructure.
Jarrett v. United States was dismissed without a binding precedent, but its legacy endures. The case revealed the fundamental mismatch between mid-20th-century tax principles and 21st-century digital economies. When value can be generated autonomously by code, “dominion and control” no longer maps cleanly onto human intent or economic benefit.
Rethinking Jarrett is not about special treatment for crypto. It is about updating the realization doctrine to fit new modes of value creation. Whether Congress or the courts lead that shift will shape not only how staking is taxed but also how the U.S. positions itself in global innovation and digital asset competitiveness. If the law continues to treat every line of code that mints a token as a taxable event, the U.S. risks taxing the future before it even becomes real.