The Crypto Industry Is Talking About Taxes, And The Senate Is Listening

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On June 7, 2022, U.S. Senators Kirsten Gillibrand (D-NY) and Cynthia Lummis (R-WY) introduced the Lummis-Gillibrand Responsible Financial Innovation Act (the “Law“), a comprehensive legislative scheme for the regulation of crypto that includes significant tax relief measures. The tax proposals introduced by Sections 201-206 and 208 of the Act are described below.

Crypto staking is not taxed until disposed (
Second. 208.
)

The law would provide that digital assets generated by mining and staking activities are not taxable upon creation, but are instead excluded from gross income until the assets are disposed of. This position would deny Notice 2014-21and align more closely with that of the taxpayer in Jarrett v. United Statesdiscussed here in a previous edition of BrassTax. The proposed effective date is December 31, 2022.

Small personal crypto transactions are tax exempt (
Second. 201.
)

The law includes a de minimis exception that would exclude from gross income up to $200 (adjusted for inflation) of recognized gain or loss from the disposition of “virtual currency”, subject to an aggregation rule. This exception applies only to personal transactions for the purchase of goods or services, and does not apply where virtual currencies are exchanged for cash, cash equivalents, digital assets, or other securities or commodities. . The proposed effective date is December 31, 2022.

Commodity Trading Safe Harbor expanded to include certain cryptocurrencies (
Second. 203.
)

The law would clarify that own-account trading in certain digital assets is covered by the commercial safe harbor under section 864(b). This is a clarification that the crypto industry has long requested and that the Treasury Department and the Internal Revenue Service (the “IRS”) are reluctant to address, discussed here in a previous edition of BrassTax. The proposed effective date is December 31, 2022.

Crypto loans are generally not taxable (
Second. 205.
)

The law clarifies that digital asset loan agreements are generally non-taxable events. This treatment generally aligns with President Joe Biden’s proposal, discussed here in a previous edition of BrassTax. The proposed effective date is December 31, 2022.

Limit the scope of cryptocurrency tax reporting by narrowing the definition of “broker” (
Second. 202.
)

The law would clarify and limit the crypto reporting regime to those engaged in the “ordinary course of a trade or business” of making sales transactions for “customers.” This would likely exclude cryptocurrency miners, validators, and software and hardware developers from the tax reporting regime. The proposed effective date is December 31, 2025.

DAOs are required to file tax returns (
Second. 204.
)

The law would classify decentralized autonomous organizations (“DAOs”) by default as “business entities” if the DAOs are “properly incorporated or organized under the laws of any state or foreign jurisdiction as a decentralized autonomous organization , cooperative, foundation or any similar entity.” This would clearly indicate that those entities that qualify as DAOs are subject to tax filing requirements. The proposed effective date is December 31, 2022.

One-year deadline for IRS to provide tax advice on many vexing crypto-related tax issues (
Second. 206.
)

The law directs the IRS to adopt, within one year, additional guidance regarding other long-standing issues in the digital asset industry, including: forks and airdrops; merchant acceptance of digital assets; mining and staking of digital assets; charitable donations of digital assets; and the characterization of payment stablecoins as debt. The proposed effective date for the adopted guidelines is December 31, 2023.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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