Eric Lee/Photographer: Eric Lee/Bloomberg
A bipartisan House duo is drawing up a cryptocurrency tax framework that would provide a safe harbor for some stablecoin transactions and delay taxation of rewards earned by verifying blockchain transactions.
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The cryptocurrency sector has clamored for legislation that would clarify the tax treatment of digital assets, even as a broader measure to establish regulation of the assets is still under negotiation. Republican Rep. Max Miller of Ohio and Democrat Rep. Steven Horsford of Nevada have obliged with a rough draft that would align the taxation of cryptocurrencies with that of traditional securities.
The draft, a mix of bill text and policy aims not yet translated into legislative language announced by lawmakers, would exempt transactions of regulated stablecoins that consistently maintain a value between $0.99 and $1.01 from capital gains tax.
An explanatory note included in the draft limited the tax exemption to transactions under $200. But the final text may change what tokens would be covered by that safe harbor, aides for both congressmen said.
The proposal also takes a stab at creating safe harbors for the tithing of rewards collected for verifying blockchain transactions.
“America’s Tax Code has failed to keep pace with modern financial technology,” Miller said in a statement. “This bipartisan legislation brings clarity, parity, fairness, and common sense to the taxation of digital assets.”
Valerie Plesch/Photographer: Valerie Plesch/Blo
Miller and Horsford sit on the powerful House Ways and Means Committee, which has jurisdiction over the Tax Code, and are the first on the panel to put pen to paper on a cryptocurrency tax framework. Their draft bill is separate from an effort by committee leadership to craft cryptocurrency legislation; the authors said they focused on stablecoins in the draft because Congress has already enacted legislation for their regulation.
“The hope is that the committee will work together in good faith to set these critical rules of the road,” a spokesperson for Horsford said.
The proposal offers a compromise on the taxation of rewards earned through staking and mining cryptocurrencies, which involve verifying transactions on a blockchain network.
Under guidance the IRS issued during the Biden administration, rewards collected in exchange for staking are taxed when they’re received. Republicans have called for that guidance to be reviewed, arguing it taxes an asset before the owner has realized a gain.
Progressive Democrats want that guidance to remain in place, however, arguing that the rewards are a form of compensation, which is typically taxed when received.
Miller and Horsford seek to find a middle ground by giving the taxpayer the option to defer tax on a reward for five years. At that point, the reward would be taxed as income based on its fair market value. Crypto tax legislation introduced by Senate Republican Cynthia Lummis earlier this year would leave the rewards untaxed until sold, as the industry has urged.
The draft also would bring cryptocurrencies under the tax regime governing securities and in some cases commodities transactions. It would include digital assets in capital gains tax exemptions for foreigners trading securities through a domestic third party, such as broker or exchange, and investors lending securities.
The proposal also offers cryptocurrency traders the ability to use mark-to-market accounting, which requires taxpayers to recognize unrealized losses and gains based on the fair market value of securities at the end of each year. The method can benefit taxpayers by allowing them to deduct trading losses from income derived from other sources such as wages.
The draft bill aims to extend restrictions on deducting losses from wash trades to digital assets and close loopholes that allow transactions designed to lock in cryptocurrency gains while delaying the corresponding tax liability.
