Senate Bill Addresses Tax Treatment of Crypto

Bi-partisan legislation recently proposed by in the Senate signals the government’s intent to address longstanding confusion surrounding the tax treatment of digital assets such as cryptocurrencies.

Senators Cynthia Lummis, a Wyoming Republican, and Kirsten Gillibrand, a New York Democrat, introduced the Responsible Financial Innovation Act (S. 4356) on June 7th.  This legislation would establish a regulatory framework for digital assets including so-called stablecoin cryptocurrencies.

According to Gillibrand, “digital assets, blockchain technology and cryptocurrencies have experienced tremendous growth in the past few years and offer substantial potential benefits if harnessed correctly.”  Gillibrand believes that “it is critical that the United States play a leading role in developing policy to regulate new financial products, while also encouraging innovation and protecting consumers.”

For the purposes of this bill, a “digital asset” is defined as a natively electronic asset that: (a) confers economic, proprietary, or access rights or powers; and (b) is recorded using cryptographically secured distributed ledger technology, or any similar analogue.

This definition includes virtual currency and ancillary assets, payment stablecoins, and other securities and commodities. An “ancillary asset” as referred to in the legislation as an intangible, fungible asset that is offered, sold, or otherwise provided to a person in connection with the purchase and sale of a security through an arrangement or scheme that constitutes an investment contract.

The proposed legislation grants regulatory authority to the Commodity Futures Trading Commission, and not the Securities and Exchange Commission. The legislation also provides a legal distinction between which digital assets are treated as commodities or securities using the Supreme Court’s Howey test for determining whether a transaction qualifies as an investment contract.

The legislation would amend the definition of a digital asset broker set forth in the Infrastructure Investment and Jobs Act (PL 117-58).  The modified definition of a digital asset broker would be “any person who for consideration stands ready in the ordinary course of a trade or business to effect sales of digital assets at the direction of their customers.” Furthermore, the digital asset reporting requirement under PL 117-58 would be delayed until January 1, 2025.

If the proposed legislation becomes law, the IRS would be required, within one year, to adopt guidance on the disposition of so-called forks and airdrops, merchant acceptance of digital assets, mining and staking, charitable contributions of digital assets, and the legal characterization of payment stablecoins as indebtedness.

Important tax provisions include a $200 per transaction de minimis exclusion from gross income when virtual currency is used for payment of goods and services, and the extension of safe harbors for securities and commodities trading activity by non-U.S. persons who use a U.S.-based financial institution for digital asset trading purposes.

Under this legislation, the Government Accountability Office would be directed to report to Congress, the Treasury Department, and the Labor Department on the potential opportunities and risks of retirement investing using digital assets.  So far, the federal government has discouraged such investments, but their potential viability has been gaining traction, especially among younger workers.

This legislation has bipartisan support, but is likely to face significant changes if it moves forward.  No matter the fate of this particular legislation, the tax treatment of crypto seems to be a priority for lawmakers.  “As this industry continues to grow, it is critical that Congress carefully crafts legislation that promotes innovation while protecting the consumer against bad actors” Senator Lummis has said.

If you have questions on any tax, business or other legal matter, please contact your tax or business attorney at Jsenney@pselaw.com or 937-223-1130.

AUTHOR: Jeff Senney
jsenney@pselaw.com


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