The early dismissal of a federal lawsuit that could have resolved whether certain cryptocurrency tokens can be taxed as federal income feels like business as usual for an industry accustomed to uncertainty. At issue in this taxpayer-initiated lawsuit was whether cryptocurrency tokens generated through the staking process are properly taxed as income. Resolution of this issue was poised to make a significant effect on the digital asset tax scheme, particularly after Ethereum – the world’s second largest cryptocurrency by market cap – recently transitioned to a proof-of-stake consensus protocol.

Plaintiffs, two Tennessee taxpayers, engaged in a cryptocurrency staking operation involving Tezos, a cryptocurrency that uses the proof-of-stake mechanism to validate transactions. Transaction validators for proof-of-stake platforms must first “stake” or pledge as collateral a number of their own tokens as their “buy in” to be chosen as a validator. If chosen, the staker-validator then uses their computing power to validate transactions, or blocks of data, that are added to a blockchain. Successful validators are rewarded with the cryptocurrency tokens that are created when the new blocks of data are validated and added to the blockchain.

In 2019, Plaintiffs’ Tezos staking efforts created 8,876 new Tezos tokens. When tax season arrived, Plaintiffs initially reported $9,407 in “other income” from the new Tezos tokens on their 2019 tax returns. Later claiming…