In the wake of a political sea change in Washington, Republicans have begun discussing tax changes for next year. The discussion centers around a process known as “budget reconciliation” and the extension of provisions of the Tax Cuts and Jobs Act. If Congress passes significant tax changes next year, crypto should be included in that conversation—especially if it’s used to raise money for the federal government.
We don’t need to go into detail about the process known as budget reconciliation, but a short explanation of how the federal government counts its spending and revenue is in order. In short, budget reconciliation enables pieces of major federal legislation specifically related to taxes and spending, to pass with a majority of votes in Congress and without a 60-vote threshold in the Senate. Discussions about tax cuts inevitably involve a discussion about the amount of revenue the government no longer takes in as a result of those tax cuts, potentially adding to a deficit: when the federal government spends more than it takes in. To mitigate deficits, these discussions around tax policy often include proposals to raise revenue in order to offset the “revenue” that actually stays in taxpayer’s pockets.
We and the crypto world at large have frustrating memories of the changes to the definition of “broker” that could (still) result in reporting requirements for non-custodial wallets, miners, and mere software. This provision was originally included in an infrastructure bill because it would raise revenue—or at least some in Washington thought it would. It was used as a “pay-for” for something else.
Several other measures related to crypto tax policy could raise revenue for the federal government. One in particular that Congress is considering is applying “wash sale” rules to crypto transactions. Wash sale rules prohibit taxpayers from claiming a loss upon selling certain assets, like stocks, when they simply re-purchase that same asset within a short time frame.
Applying wash trading rules to certain digital assets is prudent and equal treatment with traditional finance. However, the cryptocurrency ecosystem should not serve as a mere revenue raiser yet again; there should be a fair bargain. Coin Center has long been talking about ways to fix cryptocurrency tax treatment, and there is no shortage of new, thoughtful opportunities to resolve emerging cryptocurrency tax issues. If provisions relating to cryptocurrency are used to generate revenue for the federal government, provisions that put cryptocurrency on par with other assets and resolve outstanding questions should also be included. Even if crypto is not used to pay for other tax provisions, a bill contemplating any major changes to the tax code should also ensure that improvements are made when it comes to the treatment of crypto.
Several bipartisan provisions can be enacted as part of this process next year:
- The Virtual Currency Tax Fairness Act extends the existing foreign currency tax exemption for low-value day-to-day personal transactions to cryptocurrencies. This bill has been bipartisan for several sessions of Congress – most recently, with support from Senators Ted Budd (R-NC), Kyrsten Sinema (I-AZ), Kirsten Gillibrand (D-NY), and Cynthia Lummis (R-WY).
- The Providing Tax Clarity for Digital Assets Act clarifies that taxes on block rewards are due only upon disposition of the newly created coins, not upon receipt.
- The Keep Innovation in America Act would resolve questions surrounding the definition of a broker and repeal Section 6050I of the tax code, which requires that recipients of crypto transactions of $10,000 or more collect, verify, and report to the IRS personal information about the sender without a warrant. The provision is already in effect and implements unconstitutional financial surveillance.
- The Safe Harbor for Taxpayers with Forked Assets Act would provide for a safe harbor for taxpayers when IRS rules and guidance are unclear.
- Congress should remove the appraisal requirement for crypto donations to charities, especially when readily available data from exchanges can determine the prices 24/7.
Coin Center has previously advocated for many of these provisions, including in response to a very thoughtful request for input from Senators Ron Wyden and Mike Crapo, who lead the Senate Finance Committee and will have a central role in creating tax policy next year. We’re grateful for their and several legislators’ years of dedication to resolving these issues and offering solutions to improve how the federal government taxes cryptocurrency. We’re optimistic that the coming years will mean that positive cryptocurrency policy improvements can be made – including when it comes to taxes.
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