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 “Act”), a comprehensive legislative scheme for the regulation of crypto that includes important tax relief measures. Tax proposals introduced by Sections 201-206 and 208 of the Act are described below.
Crypto Staking Not Taxed Until Disposition (Sec. 208.)
The Act would provide that digital assets generated from mining and staking activities are not taxable upon creation, but rather are excluded from gross income until the disposition of those assets. This position would repudiate Notice 2014-21, and more closely align with that of the taxpayer in Jarrett v. United States, discussed here in a prior edition of BrassTax. The proposed effective date is December 31, 2022.
Small Personal Crypto Transactions Are Exempted From Tax (Sec. 201.)
The Act includes a de minimis exception that would exclude from gross income up to $200 (adjusted for inflation) of gain or loss recognized from the disposition of “virtual currency,” subject to an aggregation rule. This exception only applies with respect 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 (Sec. 203.)
The Act would make clear that trading for one’s own account in certain digital assets is covered by the trading safe harbor under Section 864(b). This is a clarification that the crypto industry has long requested and which the Department of Treasury and the Internal Revenue Service (the “IRS”) has been hesitant to address, discussed here in a prior edition of BrassTax. The proposed effective date is December 31, 2022.
Crypto Lending Generally Not Taxable (Sec. 205.)
The Act makes clear that digital asset lending agreements are generally non-taxable events. This treatment generally aligns with President Joe Biden’s proposal, discussed here in a prior edition of BrassTax. The proposed effective date is December 31, 2022.
Limiting the Scope of Crypto Tax Reporting by Narrowing the Definition of “Broker” (Sec. 202.)
The Act would clarify and narrow the reporting regime for crypto to persons engaged in the “ordinary course of a trade or business” of effecting sales transactions for “customers.” This would likely exclude from the tax reporting regime cryptocurrency miners, validators, and software and hardware developers. The proposed effective date is December 31, 2025.
DAOs Are Obligated to File Tax Returns (Sec. 204.)
The Act would classify decentralized autonomous organizations (“DAOs”) by default as “business entities” if the DAOs are “properly incorporated or organized under the laws of a State or foreign jurisdiction as a decentralized autonomous organization, cooperative, foundation or any similar entity.” This would make clear that such entities that qualify as DAOs are subject to tax return filing requirements. The proposed effective date is December 31, 2022.
Hard One Year Deadline for the IRS to Provide Tax Guidance on Many Vexing Crypto Tax Issues (Sec. 206.)
The Act calls upon the IRS to, within one year, adopt additional guidance regarding other long-standing issues in the digital asset industry, including: forks and airdrops; merchant acceptance of digital assets; digital asset mining and staking; charitable contributions of digital assets; and the characterization of payment stablecoins as indebtedness. The proposed effective date for the adopted guidance is December 31, 2023.