Overview
On June 4, the House Ways & Means Committee released drafts of seven tax bills designed to address various issues regarding the taxation of digital assets. The Ways & Means Committee is holding a hearing to discuss these bills on June 9.
The bills address topics in three main areas: (1) clarity on issues unique to digital assets; (2) parity with traditional finance (TradFi); and (3) compliance and guardrails. These topics largely overlap with previously introduced comprehensive digital asset tax bills, including the These prior bills paved the way for the tax writing committee to act, though the Ways & Means bills deviate in some important respects from these prior bills.
The Ways & Means Committee likely divided the digital asset tax provisions into seven bills to allow members to sign on to separate bills. This should facilitate bipartisan support for at least some of the bills. The Committee has indicated that it would like to put the bills to a vote this year.
The bills contain various effective dates, which is likely to create confusion. In addition, the bills grant authority to the Department of the Treasury (Treasury) and the Internal Revenue Service (IRS) to provide guidance on a number of issues. Thus, once legislation is enacted, attention will turn to Treasury and the IRS to implement it.
As further discussed below, the bills address the following issues.
Clarity on Issues Unique to Digital Assets:
- The provides an election to defer taxation of “newly created digital assets,” i.e. mining and staking rewards. It also provides rules for the character and source of validation rewards and allows grantor trusts to stake digital assets without running afoul of the grantor trust rules.
- The Less Tax Paperwork for Digital Asset Owners Act provides an exclusion from income for de minimis (i.e., less than $10) network fees, provides a simplified accounting method (a modified mark-to-market method) for widely traded digital assets, and generally allows for the tax-free disposition of qualified US dollar stablecoins that are fairly closely pegged to a dollar.
Parity with TradFi:
- The Providing Analogous Rules for Digital Assets Act extends the following rules applicable to TradFi to digital assets:
- Section 1058 lending safe harbor;
- Section 475 mark-to-market method for traders and dealers; and
- Section 864(b)(2) trading safe harbor.
- The Charitable Deductions for Digital Asset Donations Act provides taxpayers may claim a charitable deduction for the donation of widely traded digital assets without a qualified appraisal.
Compliance and Guardrails:
- The Applying Existing Tax Anti-Abuse Rules to Digital Assets Act extends the Section 1091 wash sale rules and Section 1259 constructive sale rules to digital assets.
- The Digital Assets Voluntary Disclosure Program Act provides a time-limited voluntary disclosure program and modified penalty, in lieu of Section 6662, for taxpayers who self-report their failure to comply with the appropriate tax rules.
- The End Digital Assets Tax Shelters Act would expand the Section 865(g) sourcing rules for personal property to treat US citizens or resident aliens as a US resident if that person was treated as a US resident during any of the 10 taxable years preceding the sale of a digital asset, unless they paid income tax equal to at least 10% of the gain derived from such sale to a foreign country.
The Tax Clarity for Mining and Staking Act
An election to defer tax on newly minted digital assets
The provides that most taxpayers would have the option to elect between two options as to how their newly minted digital assets would be taxed.
The default method would provide that newly minted digital assets are taxed at the fair market value of the assets as of the acquisition date. For taxpayers who are taxed under this default method, newly minted digital assets would be taxed as ordinary income at the time of acquisition, based on the fair market value as of the date of acquisition.[1] Additionally, costs in connection with validation activities (i.e., mining and staking activities) are not treated as capitalized expenses. The bill does not say the expenses are deductible as ordinary expenses, so presumably they are only deductible if otherwise allowed as deductions under the tax code.
Taxpayers would be able to elect to defer taxation on “qualified newly minted digital assets” until the time that such asset is disposed of. The bill clarifies that any disposition—even nontaxable dispositions, such as gifts, inheritances, or distributions from a trust—triggers the tax.
If the taxpayer elects to defer, the gain or loss on disposition would still be ordinary income or loss. Additionally, costs in connection with validation activities (i.e., mining and staking activities) would be required to be capitalized. However, losses would be limited to the amount of such loss to the extent of the portion of the taxpayer’s basis in the asset not attributable to acquisition costs. In other words, if a taxpayer’s basis in an asset was entirely acquisition costs, then no loss could be recognized on disposition.
Not all taxpayers may make such elections. The bill provides that controlled foreign corporations (CFCs), passive foreign investment corporations (PFICs), and foreign trusts may not make the election to defer. Additionally, partnerships in which a CFC, PFIC, or foreign trust is a partner may not make such election. Finally, the bill gives the Treasury and IRS the authority to provide that partnerships in which a CFC, PFIC, or foreign trust is an indirect partner or beneficiary may not make such election.[2]
What assets qualify as qualified newly minted digital assets
A “qualified” newly minted digital asset for which an election may be made is generally a digital asset which is issued in connection with validation activities, and with respect to which the taxpayer is the first owner of the asset (or, in the case of staking, acquired the newly minted token promptly after it was issued). If the validation is through staking, the taxpayer must be the person who holds the staked digital assets (though it is not entirely clear what is meant by holding in the context of a delegated staking arrangement); otherwise (e.g., mining), the taxpayer must be the person who validated the transaction.
The bill further provides that taxpayers may use “any reasonable method” to determine whether a digital asset is a newly minted digital asset. By limiting the election to newly minted rewards, the bill requires bifurcating validation rewards into those that qualify for the election and those that do not. Even with the permission to use any reasonable method to determine whether a digital asset is newly minted, this is likely to be difficult for both taxpayers and the IRS to administer.
Sourcing rules
The Tax Clarity for Mining and Staking Act provides that income is treated as income from within the United States if the taxpayer receiving the reward is a US resident as of the date of the acquisition, and as income from without the United States if the taxpayer is not a resident as of the date of the acquisition.[3]
Grantor trust rules
The Tax Clarity for Mining and Staking Act provides that an entity does not fail to qualify as a grantor trust solely by reason of the power of the trustee to engage in staking, to determine which digital assets to use in staking, to retain or distribute the rewards, or to take other actions to ensure the trust has sufficient liquidity to redeem interests. This rule is intended to apply to exchange traded products (ETPs) and would obviate the need for the safe harbor in Revenue Procedure 2025-31. The rule does not apply to entities engaged in the active conduct of a trade or business of validating digital assets.
What isn’t addressed
The Tax Clarity for Mining and Staking Act does not address liquid staking or the treatment of validation rewards for purposes of the unrelated business income tax rules applicable to tax-exempt entities or the regulated investment company rules.
Less Tax Paperwork for Digital Asset Owners Act
De minimis network fee exclusion
The Less Tax Paperwork for Digital Asset Owners Act would add Section 1044 to the tax code, which provides a de minimis exception with respect to the recognition of gain or loss on disposal of digital assets made in payment of digital asset network fees. Network fees, or “gas fees,” are amounts paid to validate a transaction. De minimis is defined as meaning $10 or less, in the aggregate, with respect to any transaction. The bill provides that the amount of any excluded network fee must be added to the amount of any deduction or in determining the basis of any asset acquired, which adds a layer of complexity.
However, the bill provides that the de minimis exception does not apply to dealers, brokers, or traders in digital assets, to a person in the trade or business of batching or validating or facilitating the validation of digital asset transactions, or to any person who engaged in more than 5,000 digital asset transactions during the tax year. In addition, the de minimis exception does not apply to any digital asset subject to certain accounting rules under Sections 475, 1051[4], or 1256.
The Lummis-Gillibrand Responsible Financial Innovation Act would have permitted a broad de minimis exclusion for digital assets used to acquire goods or services up to $200. Many industry participants may be disappointed with the more limited de minimis exclusion, but this more limited exception is likely to be more palatable to Democrats and moderate Republicans.
Simplified accounting method for widely traded digital assets
The Less Tax Paperwork for Digital Asset Owners Act adds Section 1051, which allows non-dealer and non-trader taxpayers to elect to account for “designated types of digital assets” under a modified mark-to-method standard. Under Section 1051, a taxpayer would determine the fair market value of its entire digital-asset portfolio in the aggregate as compared to the prior year, adjusted for any acquisitions or dispositions. The character of any gain or loss from this provision would be short-term capital gains or losses.
A designated type of digital asset is defined as a widely traded, fungible digital asset for which an election under Section 1051 is made. Widely traded digital assets are defined as traded digital assets[5] for which quotations are readily available on an exchange for the entire calendar year; the market capitalization of the asset exceeded $500 million for substantially all of the calendar year; and not more than 10% of the units were owned, directly or indirectly, by the taxpayer or a related person. It is not clear why the simplified accounting method is limited to widely traded digital assets as opposed to all traded digital assets.
Importantly, the wash sale and constructive sale rules[6] would not apply to assets subject to this election. An extension of the simplified method to traded digital assets would be helpful in this regard.
Treatment of US dollar stablecoins
The Less Tax Paperwork for Digital Asset Owners Act also adds Section 1063 to the code, which provides for the tax treatment of stablecoins. Section 1063 would provide that the consideration received pursuant to any sale, exchange, redemption, or disposition of “qualified US dollar stablecoins,” and the consideration used to acquire the stablecoin (i.e., the basis), are both equal to the redemption value unless the value of the stablecoin is less than 99.5% or greater than 100.5% of the redemption value.
The provision would not apply to traders, brokers, or dealers in stablecoins, or any person who engaged in more than 5,000 transactions of stablecoins (regardless of whether such transactions were received as payment for goods or services in connection with a trade or business), or to taxpayers who use a functional currency other than the dollar. In addition, if the party on the other side of the transaction is a related party, the bill adopts a requirement for a 100% peg to the dollar.
A “qualified US dollar stablecoin” is defined as a US dollar stablecoin issued by a permitted payment stablecoin issuer or foreign payment stablecoin issuer as defined in the GENIUS Act.
Changes to the broker reporting rules
The Less Tax Paperwork for Digital Asset Owners Act modifies Section 6045 to carve out qualified US dollar stablecoins in which the customer’s basis is at least 99.5% of the redemption value.
In addition, the bill allows brokers to report aggregate information relating to dispositions of digital assets used to pay de minimis network fees and the election to apply the simplified accounting method for widely traded digital assets.
Providing Analogous Rules for Digital Assets Act
The Providing Analogous Rules for Digital Assets Act, or the PAR Act, extends certain rules applicable to securities and commodities to cover digital assets in an attempt to achieve parity between digital assets and TradFi.
Digital asset lending
The PAR Act modifies Section 1058, which provides for the nonrecognition of gain or loss on the lending of securities, to include traded digital assets, which, as discussed above, are those digital assets with a readily available price quotations (regardless of the digital asset’s market cap). The bill requires that all interest, dividends, property, legal entitlements, and other distributions (e.g., forks and airdrops) with respect to the loaned digital assets be paid over to the lender.
Mark-to-market election
The PAR Act modifies Section 475 to allow dealers and traders of widely traded digital assets to elect mark-to-market treatment of their digital assets. As discussed above, widely traded digital assets are those with readily available price quotations, a market cap in excess of $500 million, and not more than 10% of the units were owned by the taxpayer or a related person. It is not entirely clear why the bill imposes a higher bar on digital assets than it does on commodities (which only requires that they be actively traded within the meaning of section 1092(d)(1)).
As discussed above, proposed Section 1051 in the Less Tax Paperwork for Digital Asset Owners Act would allow non-dealer and non-trader taxpayers to elect to account for their digital assets under a modified mark-to-method standard. It would not be a true mark-to-market, as each digital asset would not be marked to fair market value, the character would be short-term capital gains or losses instead of ordinary, and it’s not clear that the assets would be deemed to have been sold, as under a true mark-to-market. Nonetheless, these provisions together simplify the accounting for gains and losses on digital assets.
Trading safe harbor
The PAR Act modifies Section 864(b)(2) to allow foreign traders to trade digital assets on US exchanges without being treated as engaged in a US trade or business and subject to US tax.
Charitable Deductions for Digital Asset Donations Act
The Charitable Deductions for Digital Asset Donations Act provides that taxpayers claiming a charitable deduction with respect to the contribution of a widely traded digital asset[7] need not obtain a qualified appraisal with respect to the value of the asset contributed and the deduction claimed, similar to the exception for publicly traded securities.
Applying Existing Tax Anti-Abuse Rules to Digital Assets Act
The Applying Existing Tax Anti-Abuse Rules to Digital Assets Act extends the application of wash sale rules and constructive sale rules to digital assets. This is similar to previous bills (both the Miller-Horsford and Lummis-Gillibrand bills extended wash sale rules to digital assets, and the Miller-Horsford bill extended the constructive sale rules to digital assets).
Wash sale rules
The Applying Existing Tax Anti-Abuse Rules to Digital Assets Act modifies Section 1091, which provides wash sale rules,[8] to apply to “specified assets,” which are stocks, securities, or digital assets, or any contract or option to acquire or sell any such stock, security, or digital asset. The bill provides that, in the case of tokenized digital assets (such as NFTs), such tokens are treated as “substantially identical” to any stock, security, or digital asset with respect to which such token is economically equivalent.[9]
However, the bill would exclude qualified US dollar stablecoins and digital assets received in connection with the validation of digital asset transactions. In addition, mark-to-market transactions under Section 475 are already excluded from the wash sale rules, and proposed Section 1051 would exclude digital assets subject to the election for simplified accounting. Finally, de minimis network fees are not treated as recognized gain or loss, so those, too, would be excluded from the wash sale rules.
However, this provision is proposed to be effective for dispositions after the date of introduction of the bill. This presents problems in that the exceptions would not yet be effective, and it can retroactively apply to acquisitions 30 days prior to the bill’s introduction.
Constructive sales
The Applying Existing Tax Anti-Abuse Rules to Digital Assets Act further modifies Section 1259, which provides constructive sale rules,[10] to apply to digital assets (including NFTs and other tokenized assets, but excluding stablecoins).
Similar to the wash sale rule, this provision is proposed to be effective for constructive sales after the date of introduction of the bill.
Digital Assets Voluntary Disclosure Program
The Digital Assets Voluntary Disclosure Program Act would instruct the Treasury to establish a voluntary disclosure program to allow eligible taxpayers to self-report any violations of proper compliance with digital asset tax rules.[11] The bill provides that if a taxpayer makes such report and promptly pays any associated deficiencies (or enters into an installment agreement to pay such deficiencies), then, in lieu of Section 6662 penalties, an alternate penalty would apply. The amount of the alternate penalty would primarily depend on three factors: (1) whether the taxpayer signs a certification that such error was not made fraudulently or willfully; (2) the amount of the deficiency; and (3) how soon after the establishment of the program that the taxpayer made such disclosure. The alternate penalty could be as little as 0% or as high as 50%.
The program would only run for two years (24 months) after establishment.
End Digital Assets Tax Shelters Act
Section 865(g)(2) currently provides that a US citizen or resident alien is treated as a nonresident with respect to any sale of personal property unless an income tax equal to at least 10% of the gain derived from such sale is actually paid to a foreign country with respect to that gain. The End Digital Assets Tax Shelters Act provides that, if a US citizen or resident alien was treated as a US resident for purposes of Section 865 during any of the 10 taxable years preceding the sale of a digital asset, then such US citizen or resident alien is treated as a US resident with respect to that sale. However, this rule does not apply if the US citizen or resident alien actually paid income tax equal to at least 10% of the gain derived from such sale to a foreign country with respect to that gain.[12]
[1] However, the bill is silent as to the treatment of cryptocurrencies with no readily determinable fair market value.
[2] Presumably this means that such partnerships may make the election until Treasury and the IRS provide otherwise.
[3] Interestingly, a determination of whether a taxpayer is a US resident may not be made until the end of the year, when the taxpayer determines the number of days they spent in the United States over the prior three years. Would a taxpayer who, in the previous tax year, was not a US resident, receives newly minted digital assets in connection with validation activities on the first day of the current tax year, and, over the course of the current tax year, spends enough days in the United States to make them a US resident for the current tax year, treat the newly minted digital asset as foreign-source income or US-source income?
[4] See below for the discussion of the creation of Section 1051.
[5] A traded digital asset is defined as any digital asset that is fungible, quotations are readily available on an exchange, and the asset is not a tokenized or wrapped digital asset.
[6] See below for a discussion of these rules.
[7] As discussed above, these refer to digital assets that are readily traded with market caps exceeding $500 million and not substantially owned by the taxpayer or related persons.
[8] Section 1091 applies when “substantially identical” assets are acquired within 30 days before or after the date of a qualified disposition.
[9] NFTs are definitionally not fungible and therefore not ordinarily substantially identical, within the meaning of Section 1091.
[10] Section 1259 provides that a taxpayer shall be treated as having made a constructive sale when they enter into a short sale of some property and an offsetting contract with respect to “substantially identical” property.
[11] Self-reporting would require requesting an application to participate in such program and, if approved, filing amended returns for the years in question.
[12] Interestingly, this bill creates a more stringent rule for digital assets than for other personal property, as section 865 does not otherwise provide that a taxpayer will be treated as a US resident if they were treated as a US resident in any of the preceding 10 taxable years with respect to Section 865.
