Amicus Urges Court to Hear Crypto Staking Refund Suit

JOSHUA JARRETT and JESSICA JARRETT,
Plaintiffs,
v.
UNITED STATES OF AMERICA,
Defendant.

IN THE UNITED STATES DISTRICT COURT
FOR THE MIDDLE DISTRICT OF TENNESSEE

District Judge Campbell, Jr.
Magistrate Judge Newbern

BRIEF OF AMICUS CURIAE
COIN CENTER
IN SUPPORT OF PLAINTIFFS' RESPONSE TO MOTION TO DISMISS

Devin P. Lyon, Esq., BPR 032232
ARNETT, DRAPER & HAGOOD, LLP
800 S. Gay Street
First Horizon Plaza, Suite 2300
Knoxville, Tennessee 37902

for Amicus Curiae
Coin Center

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TABLE OF CONTENTS

TABLE OF CONTENTS

TABLE OF AUTHORITIES

I. INTEREST OF AMICUS CURIAE

II. ISSUE PRESENTED FOR REVIEW

III. LAW AND ARGUMENT

IV. CONCLUSION

CERTIFICATE OF SERVICE

TABLE OF AUTHORITIES

Cases

Drs. Hill & Thomas Co. v. United States, 392 F.2d 204, 205 (6th Cir. 1968)

Other Authorities

Andreas Antonopoulos, The Internet of Money: A collection of talks by Andreas Antonopoulos: Volume 1, CreateSpace Independent Publishing, August 30, 2016.

Andrew Perrin, “16% of Americans say they have ever invested in, traded or used cryptocurrency,” Pew Research Center, November 11, 2021, https://www.pewresearch.org/fact-tank/2021/11/11/16-of-americans-say-they-have-ever-invested-in-traded-or-used-cryptocurrency/

“Bitcoin Mining Map,” Cambridge Bitcoin Electricity Consumption Index, Cambridge University Centre for Alternative Finance, accessed March 8, 2022, https://ccaf.io/cbeci/mining_map

Congressional Budget Office, “Trends in the Internal Revenue Service's Funding and Enforcement,” July 2020, https://www.cbo.gov/publication/56467

Daniel Kuhn, “IRS Initiates 'Operation Hidden Treasure' to Root Out Unreported Crypto Income,” CoinDesk, March 7, 2021, https://www.coindesk.com/markets/2021/03/07/irs-initiates-operation-hidden-treasure-to-root-out-unreported-crypto-income

Drew Desilver, “IRS among least-popular federal agencies,” Pew Research Center, May 16, 2013, https://www.pewresearch.org/fact-tank/2013/05/16/irs-among-least-popular-federal-agencies/

“Emmer Leads Bipartisan Blockchain Caucus Letter to the IRS Ahead of Tax Day Urging Virtual Currency Guidance,” Rep. Top Emmer, April 11, 2019, https://emmer.house.gov/2019/4/emmer-leads-bipartisan-blockchain-caucus-letter-irs-ahead-tax-day-urging

Government Accountability Office, “Virtual Currencies: Additional Information Reporting and Clarified Guidance Could Improve Tax Compliance,” GAO-20-188, February 12, 2020, https://www.gao.gov/products/gao-20-188

Internal Revenue Service, “Comprehensive Taxpayer Attitude Survey (CTAS) 2020,” Executive Report, November 11, 2020, https://www.irs.gov/pub/irs-pdf/p5296.pdf

Internal Revenue Service, Notice 2014-21, https://www.irs.gov/pub/irs-drop/n-14-21.pdf

“IRS Waves White Flag in Lawsuit Over Taxability of Cryptocurrency Staking Reward,” Proof of Stake Alliance, February 3, 2022, https://www.proofofstakealliance.org/wp-content/uploads/2022/02/POSA-Press-Release-Feb-3-2022.pdf

James Foust, “A Duty to Answer: Six Basic Questions and Recommendations for the IRS on Crypto Taxes,” Coin Center, April 2019, https://www.coincenter.org/a-duty-to-answer-six-basic-questions-and-recommendations-for-the-irs-on-crypto-taxes/

Michael McSweeney, “Exchanges call for greater regulatory clarity at IRS crypto tax summit,” The Block, March 3, 2020, https://www.theblockcrypto.com/post/57639/exchanges-crypto-irs-tax-summity-clarity

Peter Van Valkenburgh, “Exploring the Cryptocurrency and Blockchain Ecosystem,” testimony and answers before the United States Senate Committee on Banking, Housing, and Urban Affairs, October 11, 2018, https://www.banking.senate.gov/hearings/exploring-the-cryptocurrency-and-blockchain-ecosystem

Peter Van Valkenburgh, “IRS signals retreat in court battle that could reshape block reward taxation,” Coin Center, February 3, 2022, https://www.coincenter.org/irs-signals-retreat-in-court-battle-that-could-reshape-block-reward-taxation/

Peter Van Valkenburgh, “Open Blockchains and Decentralized Identity Standards,” Coin Center, September 28, 2021, https://www.coincenter.org/open-blockchains-and-decentralized-identity-standards/

Rep. David Schweikert, et al., Letter to IRS Commissioner Charles P. Rettig, July 29, 2020, https://www.proofofstakealliance.org/wp-content/uploads/2022/03/Final-Proof-of-Stake-IRS-Letter-7.29.20.pdf

Treasury Inspector General for Tax Administration, “The Internal Revenue Service Can Improve Taxpayer Compliance for Virtual Currency Transactions,” Ref. No. 2020-30-066, September 24, 2020, https://www.treasury.gov/tigta/auditreports/2020reports/202030066fr.pdf

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I. INTEREST OF AMICUS CURIAE ¹

The Government has offered the plaintiffs a refund in the hopes of mooting this case. Sixth Circuit precedent states that when analyzing whether a refund offer moots a case, courts should consider whether the plaintiff's claim presents a question of “public importance.” See Drs. Hill & Thomas Co. v. United States, 392 F.2d 204, 205 (6th Cir. 1968) (“[u]nder the facts as stated above, we believe that the only arguable grounds for avoidance of dismissal for mootness would be the probability of immediate repetition of the issue and the public importance of a final decision”). Coin Center files this brief to explain why the question presented in this case has immense public importance.

Coin Center is an independent, non-profit research center focused on the public policy issues facing digital currency technologies such as Bitcoin and others. Coin Center's mission is to build a better public understanding of these technologies and to promote a regulatory climate that preserves the freedom to innovate using blockchain technologies. Coin Center frequently produces and publishes policy research from respected academics and experts, educates policymakers at all levels of government and the media about blockchain technology, and promotes sound public policy.

II. ISSUE PRESENTED FOR REVIEW

Whether an offer of a refund moots a lawsuit where the refund was rejected by Plaintiffs and the matter being litigated is a matter of public importance requiring a final decision from this Court.

III. LAW AND ARGUMENT

A final decision in this case would carry great public importance. Millions of Americans now use cryptocurrencies, and a substantial fraction of those users also generate blockchain rewards through mining and staking activities. See Andrew Perrin, “16% of Americans say they have ever invested in, traded or used cryptocurrency,” Pew Research Center, November 11, 2021, https://www.pewresearch.org/fact-tank/2021/11/11/16-of-americans-say-they-have-ever-invested-in-traded-or-used-cryptocurrency/; “Bitcoin Mining Map,” Cambridge Bitcoin Electricity Consumption Index, Cambridge University Centre for Alternative Finance, accessed March 8, 2022, https://ccaf.io/cbeci/mining_map.² This is a good thing. While these technologies carry risks and may be used for trivial or even criminal pursuits, they are also a significant improvement over existing payments and digital identity systems. See Peter Van Valkenburgh, “Exploring the Cryptocurrency and Blockchain Ecosystem,” testimony and answers before the United States Senate Committee on Banking, Housing, and Urban Affairs, October 11, 2018, https://www.banking.senate.gov/hearings/exploring-the-cryptocurrency-and-blockchain-ecosystem; Peter Van Valkenburgh, “Open Blockchains and Decentralized Identity Standards,” Coin Center, September 28, 2021, https://www.coincenter.org/open-blockchains-and-decentralized-identity-standards/.

The emergence of open public digital ledgers, i.e., cryptocurrency blockchains, will be as consequential for American economic development and the individual speech and privacy rights of Americans as was the development of the open internet in the 1990s and 2000s. See Andreas Antonopoulos, The Internet of Money: A collection of talks by Andreas Antonopoulos: Volume 1, CreateSpace Independent Publishing, August 30, 2016. Cryptocurrency users want to pay their fair share of taxes, and several ecosystem participants have urged the IRS to offer clarity regarding tax liabilities so that both the value of the technology and our national tax revenue can grow. See Michael McSweeney, “Exchanges call for greater regulatory clarity at IRS crypto tax summit,” The Block, March 3, 2020, https://www.theblockcrypto.com/post/57639/exchanges-crypto-irs-tax-summity-clarity.

Nonetheless, the Internal Revenue Service has repeatedly failed to offer taxpayers clear guidance on cryptocurrency transactions. This failure has been identified by concerned members of Congress, the Government Accountability Office, the Treasury Inspector General for Tax Administration, and nonprofit advocacy organizations. See “Emmer Leads Bipartisan Blockchain Caucus Letter to the IRS Ahead of Tax Day Urging Virtual Currency Guidance,” Rep. Top Emmer, April 11, 2019, https://emmer.house.gov/2019/4/emmer-leads-bipartisan-blockchain-caucus-letter-irs-ahead-tax-day-urging; Government Accountability Office, “Virtual Currencies: Additional Information Reporting and Clarified Guidance Could Improve Tax Compliance,” GAO-20-188, February 12, 2020, https://www.gao.gov/products/gao-20-188; Treasury Inspector General for Tax Administration, “The Internal Revenue Service Can Improve Taxpayer Compliance for Virtual Currency Transactions,” Ref. No. 2020-30-066, September 24, 2020, https://www.treasury.gov/tigta/auditreports/2020reports/202030066fr.pdf; James Foust, “A Duty to Answer: Six Basic Questions and Recommendations for the IRS on Crypto Taxes,” Coin Center, April 2019, https://www.coincenter.org/a-duty-to-answer-six-basic-questions-and-recommendations-for-the-irs-on-crypto-taxes/.

On the specific issue of block reward taxation, a bipartisan group within Congress urged the IRS to revisit past guidance and offer clearer rules in the summer of 2020. See Rep. David Schweikert, et al., Letter to IRS Commissioner Charles P. Rettig, July 29, 2020, https://www.proofofstakealliance.org/wp-content/uploads/2022/03/Final-Proof-of-Stake-IRS-Letter-7.29.20.pdf.

Moreover, to the extent existing guidance on block reward taxation was clear, the IRS's decision in this case to offer the plaintiff a refund directly contradicts that past guidance without offering new guidance regarding why they have changed course. See Internal Revenue Service, Notice 2014-21, https://www.irs.gov/pub/irs-drop/n-14-21.pdf; “IRS Waves White Flag in Lawsuit Over Taxability of Cryptocurrency Staking Reward,” Proof of Stake Alliance, February 3, 2022, https://www.proofofstakealliance.org/wp-content/uploads/2022/02/POSA-Press-Release-Feb-3-2022.pdf; Peter Van Valkenburgh, “IRS signals retreat in court battle that could reshape block reward taxation,” Coin Center, February 3, 2022, https://www.coincenter.org/irs-signals-retreat-in-court-battle-that-could-reshape-block-reward-taxation/.

By attempting to moot this important case, the IRS is increasing uncertainty for thousands if not millions of already confused taxpayers. Its actions represent nothing more than an attempt to get out of an important court case that would, if it was allowed to continue, offer public clarity on a tax question with far reaching implications. For these reasons, the Government's Motion to Dismiss should be denied. The public importance of the subject matter demands a clear and binding holding irrespective of the offer of a refund. See Drs. Hill & Thomas Co. v. United States, 392 F.2d 204, 205 (6th Cir. 1968) (“[u]nder the facts as stated above, we believe that the only arguable grounds for avoidance of dismissal for mootness would be the probability of immediate repetition of the issue and the public importance of a final decision”).

Compounding the public's uncertainty regarding cryptocurrency taxation, the enforcement efforts of the IRS have ramped up. See Daniel Kuhn, “IRS Initiates 'Operation Hidden Treasure' to Root Out Unreported Crypto Income,” CoinDesk, March 7, 2021, https://www.coindesk.com/markets/2021/03/07/irs-initiates-operation-hidden-treasure-to-root-out-unreported-crypto-income/. Starving taxpayers of clear policy statements while simultaneously expanding enforcement of unclear rules will erode taxpayer faith in the rule of law, reduce tax compliance and tax revenue because of the costs inherent in determining a correct approach, and subject thousands of taxpayers to potential criminal liability without reasonable attempts to make them aware of those liabilities and how they can be avoided. See Drew Desilver, “IRS among least-popular federal agencies,” Pew Research Center, May 16, 2013, https://www.pewresearch.org/fact-tank/2013/05/16/irs-among-least-popular-federal-agencies/; Congressional Budget Office, “Trends in the Internal Revenue Service's Funding and Enforcement,” July 2020, https://www.cbo.gov/publication/56467; Internal Revenue Service, “Comprehensive Taxpayer Attitude Survey (CTAS) 2020,” Executive Report, November 11, 2020, https://www.irs.gov/pub/irs-pdf/p5296.pdf. Such a result would be an offense to the rule of law and the dignity and rights of taxpayers.

We eagerly await a decision from this Court on these important questions.

IV. CONCLUSION

For these reasons, amicus curiae Coin Center respectfully requests this Court deny the Department of Justice's Motion to Dismiss as this is a matter of public importance requiring a final decision.

Dated: March 14, 2022

Respectfully submitted,

Coin Center

By: Devin P. Lyon, BPR 032232
ARNETT, DRAPER & HAGOOD, LLP
800 S. Gay Street
First Horizon Plaza, Suite 2300
Knoxville, Tennessee 37902

Attorney for Amicus Curiae