Last Thursday, the public learned that Joshua and Jessica Jarrett had been offered a full refund of $3,793 plus statutory interest for the fiscal year 2019 on behalf of the United States Attorney General in response to their complaint regarding the tax treatment of cryptocurrency tokens, that you have received. According to court documents, a hearing between the judge, Justice Department attorneys representing the defendant and attorneys for the Jarretts is scheduled for next Thursday, February 10, to discuss next steps in the case.
Jarrett, the President and CEO of Quantify fitness, a gym in Nashville, Tennessee, released a statement showing it would not accept the refund from the IRS but would continue the process to receive a statement along with its money refund. For Jarrett, part of his complaint is a result of a lack of guidance from the IRS on how to handle cryptocurrencies received from blockchain networks in exchange for their efforts to validate transactions and create the next block on a blockchain.
The court documents list six attorneys from two separate law firms, including J. Abraham Sutherland, who has recently made a name for himself in cryptocurrency circles and also serves as an advisor to the Proof of Stake Alliance and as an adjunct professor at the University of Law School Virginia. Negotiating the DOJ case is led by David L. Forst, tax partner at Fenwick and West LLP. Fenwick represented Coinbase in its direct listing of COIN on Nasdaq, which was valued at $85 billion after the first day of trading and even has a testimonial from Paul Grewal, Coinbase’s Chief Legal Officer, on how helpful the company was in understanding a new technologies such as cryptocurrency.
The Court of Public Opinion
the news that broke on Tuesday that drew such a high level of public attention to the case was written by Casey Wagner, senior reporter at Blockworks, a publication co-founded by Jason Yanowitz. Wagner was a former reporter at Bloomberg News, and Blockworks’ editor-in-chief is Dan Keeler, who was formerly Frontier Markets Editor at the Wall Street Journal.
As the cryptocurrency community reacted to the news, it was clear that beyond the courts, a major battle in public discourse must ultimately surface between the different blockchain protocols, as this not only represents different blockchain protocols, but also future growth could affect appreciation of cryptocurrencies in general.
Should the crypto community be able to come together and unite on tax issues, regulators like the IRS and SEC will no longer be able to provide loose guidance, if any at all, on areas like tax legislation and the general treatment of cryptocurrency regulators. With the Biden administration showing a keen interest in crypto and lawmakers holding hearings nearly every week, the industry needs to develop a professional and credible relationship with Capitol Hill. Otherwise, the potential benefits to the crypto ecosystem will simply be brushed aside by congressmen and senators who may be willing to pursue bipartisan cryptocurrency policies.
Schedule of the court case asking for a refund and an explanation
Below is a timeline that will help us roll back the events of the court trial, and then I’ll share quotes from an expert on these types of cases that will help better understand what’s next for the Jarretts in court could come.
July 31, 2020 – The Jarretts are seeking a refund of as the couple seeks a refund of $3,793 plus statutory interest and a brief filed in support of Jarrett’s claim that the “8,876 new Tezos cryptocurrency reward tokens in 2019 no taxable income under the Internal Sales Tax Act.” The briefing author was J. Abraham Sutherland, who has been recognized in the cryptocurrency community for this and other notable work related to additional language he brought to the attention of the public in the Infrastructure and Investment Jobs Act and which could have an impact on the cryptocurrency, is rapidly gaining popularity among holders when making peer-to-peer transactions.
26. May 2021 A complaint is filed in the U.S. District Court of the Middle District of Tennessee, Nashville Division, seeking “recovery of federal income taxes paid to Defendant United States of America by and through its agency, the Internal Revenue Service (the “IRS”) with respect to the Jarretts’ tax year ended December 31, 2019 and statutory interest thereon.” Attorneys listed for plaintiff in court documents show Jeffrey M. Harris and Cameron T. Norris of Consovoy McCarthy PLLC and David L. Forst and Sean P. McElroy of Fenwick and West LLP and Sutherland, the aforementioned author of the 2020 brief.
December 20, 2021 – This is the date of a letter from the U.S. Department of Justice, Tax Division, notifying the Jarretts that the U.S. Attorney General has requested a full refund of $3,793 plus statutory interest in the complaint for the 2019 tax year, which was approved on behalf of the Attorney General . The letter informs the Jarretts that the Internal Revenue Service has been authorized and directed to schedule an overpayment of $3,793 plus statutory interest for the 2019 tax year.
January 5, 2022 – Forst of Fenwick and West LLP receives an email from the DOJ containing a draft dismissal.
January 14, 2022 – Forst is on the phone with the DOJ.
January 25, 2022 – Forst writes a letter to Ryan McMonagle in the United States Department of Justice Tax Division indicating that the DOJ’s offer to direct the IRS to issue a full refund to the Jarretts benefits the parties. quarrel over. Forst goes on to cite the January 14 call itself as the reason the plaintiffs disagree with the view that the case can be dismissed and closed. Forst then provides the details of the Jan. 14 phone call with the DOJ, stating, “During the phone call, you were unable or unwilling to explain the rationale for the Department’s offer or its significance to the Jarretts in subsequent tax years.” — or indeed, in 2019 itself.” Forst also expressed frustration in the call: “The IRS also appears to be giving no assurances regarding the only issue that led to this litigation — whether tokens generated by staking a specific cryptocurrency are taxable income at the time of creation. ”
February 3, 2022 – Court documents show the above notices that a case management conference is scheduled for February 10, 2022, which is usually when the judge and the parties (the plaintiff and the defendant) meet before setting a trial date.
Exclusive Interview With Former DOJ Attorney On The Importance Of The Trial
I had the privilege of speaking with Christopher S. Rizek, a Fellow at Caplin and Drysdale and Adjunct Professor at Georgetown, who previously served as Trial Counsel with the US Department of Justice, Tax Division, and as Attorney-Advisor and Associate Tax Legislative Counsel with the US Treasury Department, Office of Tax Legislative Counsel, where he had significant responsibility for legislation and regulatory action related to taxpayer rights, tax practices and procedures, and tax compliance.
Jason Brett: Would you consider this a test case for crypto tax treatment?
Christopher S. Rizek: As of now, the failure of the IRS to accept the refund makes it clear that this is a test case; However, until the judge decides to issue an opinion, there is no real precedent for anyone. It is simply Mr. Jarrett and his wife who are being offered an IRS refund.
Brett: What if the IRS processes the check and mails it to Jarrett? Is the case closed?
Risk: That’s interesting, and it seems clear that the hope of Mr. Jarrett and his attorneys was to set a precedent through this lawsuit. However, all of this area surrounding crypto and taxation is a hot topic and a lot of clarity is still missing. The IRS could mail a check and technically close the case, assuming the court allows it. It is evident that the IRS does not want to use this case as a vehicle to solve the substantive issues and may choose to solve them through its own policymaking.
Brett: Why is there a tax break for “created wealth”? Can you give another example where this applies?
Risk: The basic idea is that there is no “realization event” until the property is sold. A classic example is self-made works of art.
Brett: What happens now after the taxpayer has refused the refund? Presumably, the DOJ will move to dismiss the case with prejudice, and the taxpayer will appeal. Will he get his day in court?
Risk: That is up to the judge. The first question will be whether to even get the merits of the crypto issues or simply grant the DOJ’s request.
Brett: Does this mean there is a judge who could very well set a precedent if he or she gave an opinion on staking?
Risk: If the court proceeds in the matter and the judge writes an opinion, then yes, it could be cited by others as the right way to solve the substantive tax issues.
Brett: If you’re the Jarretts, are you better off taking the money and expecting not to have to pay taxes on your stake rewards for years to come? Should others follow suit and simply file their taxes in a way that shows no taxes are owed on staking as newly created property?
Risk: People who are staking should talk to their own accountant about this, I can’t advise them. But I can say that if the DOJ prevails and the court refuses to deal with the merits, this case will not establish a principle that is necessarily applicable to other situations or cases.