July 11, 2023
In a letter to stakeholders and experts, finance leaders seek input on how to address the uncertain tax treatment of digital assets.
washington dc – Senate Finance Committee Chairman Ron Wyden (D-Oregon) and Finance Committee Ranking Member Mike Crapo (R-Idaho) today received a call from experts, stakeholders, and experts. With an open letter seeking views, we have launched an effort to address the uncertainty surrounding the tax treatment of digital assets. Stakeholder.
“The rapid emergence of digital assets has raised new regulatory issues, including their proper treatment under federal tax law. [tax code] There is no simple taxonomy of digital assets, but a distinction between types of assets. This uncertainty raises complex reporting issues for taxpayers and requires consideration of how reporting is done. [code] Provide clearer guidance to taxpayers on the treatment of digital asset transactions. ” Wyden and Krapo write:
A letter from Finance Committee leaders set a September 8 deadline for responses to be sent to responses@finance.senate.gov. The full letter is available online and at:
To members of the Digital Assets community and other interested parties:
The rapid emergence of digital assets raises new regulatory issues, such as their proper treatment under federal tax law. Rather than simply classifying digital assets, the 1986 Internal Revenue Code, Amendments (IRC) distinguishes between types of property. This uncertainty has created complex reporting issues for taxpayers, and the IRC needs to consider how it can provide clear guidance to taxpayers on how to handle digital asset transactions. In recent months, the Finance Committee has launched a bipartisan effort to identify key issues at the intersection of digital assets and tax law. To provide background to the current law, Chairman Wyden and Senior Commissioner Mr. Krapo asked the Joint Commission on Taxation to prepare a report on the taxation of digital assets. The report is available here.
Today, we are asking you to help us better understand how Congress can address the tax challenges and opportunities presented by digital assets. To that end, we ask questions such as:
Marking-to-Market for Traders and Dealers (IRC Section 475)
- Should digital asset traders be allowed to mark the market? Why?
- Should digital asset dealers be allowed or required to mark the market? Why?
- Should the answer depend on the type of digital asset? How should a digital asset be determined to be actively traded (under IRC Section 475(e)(2)(A))?
Safe Harbor Transactions (IRC Section 864(b)(2))
- When should the policies behind trading safe harbors (which encourage foreign investment in U.S. investment assets) apply to digital assets? When do these policies apply to (at least some) digital assets? If required, digital assets must fall under IRC Section 864(b)(2)(A) (Securities Trading Safe Harbor), IRC Section 864(b)(2)(B). ) (safe port trading of commodities), or should the answer depend on the regulatory status of the particular digital asset? why?
- Another possibility is that digital assets may be subject to new separate trading safe harbors. If so, should additional restrictions on products subject to safe harbor transactions apply? Why?
- To the extent additional restrictions on commodities for safe harbor trading apply, how should the terms “organized commodity exchange” and “customary completed types of trades” be interpreted (IRC Section 864(b)(2)(B)(iii)) interpreted in the context of different types of digital asset exchanges?
Handling Digital Asset Loans (IRC Section 1058)
- Describe the different types of digital asset loans.
- If IRC Section 1058 explicitly applies to digital assets, would a company that allows its customers to lend digital assets enter into standard loan agreements that meet the requirements of that section? will occur?
- Should IRC Section 1058 include all digital assets or only a subset of digital assets? Why?
- If a digital asset is loaned to a third party and the digital asset undergoes a hard fork, protocol change, or airdrop during the term of the loan, it would be more appropriate for the borrower’s income to be recognized at the time of such transaction. Or is it subsequently done by the lender when the property is returned? please explain.
- Are there other transactions similar to hard forks, protocol changes, or airdrops that could occur during the life of the loan? Please explain if is more appropriate.
Wash Sales (IRC Section 1091)
- Under what circumstances does a taxpayer take the position that economic substance (IRC Section 7701(o)) applies to wash sales involving digital assets?
- Are there existing best practices for reporting digital asset transactions that are economically equivalent to wash sales?
- Should IRC Section 1091 apply to digital assets? Why or why not?
- Should IRC Section 1091 apply to assets other than digital assets, and if so, what assets and why, or why not?
Constructive Selling (IRC Section 1259)
- Under what circumstances does a taxpayer take the position that economic substance (IRC Section 7701(o)) applies to constructive sales of digital assets?
- Are there existing best practices for reporting digital asset transactions that equate to economically constructive sales?
- Should IRC Section 1259 apply to digital assets? Why?
- Should IRC Section 1259 apply to assets other than digital assets? If so, what assets and why?
Timing and sources of income from staking and mining
- Describe the different types of rewards offered for mining and staking.
- How should returns and rewards received for verification (mining, staking, etc.) be treated for tax purposes? Why? Should different validation mechanisms be handled differently? Why?
- Should the nature and timing of income from mining and staking be the same? Why or why not?
- What are the most important factors in deciding when an individual will participate in a mining transaction or business?
- What are the most important factors in deciding when an individual participates in a staking transaction or business?
- Describe an example arrangement for those participating in the staking pool protocol.
- Describe the proper treatment of the various types of income and rewards received by individuals who bet or participate in pools for others.
- What is a good source of staking rewards and why?
- Please provide feedback on the Biden administration’s proposal to impose an excise tax on mining.
Non-functional currency (IRC Section 988(e))
- should minimal Do non-recognition rules like the rules in IRC Section 988(e) apply to digital assets? Why?
- Which threshold is right and why?
- Are there existing best practices that prevent taxpayers from evading tax liability when non-approval rules are applied? What reporting regimes can help taxpayers comply?
FATCA and FBAR reports (IRC Sections 6038D, 1471-1474, 6050I, and 31 USC Section 5311 or later)
- When do taxpayers report digital assets or digital asset transactions on FATCA forms (e.g., Form 8938), FBAR FinCEN Form 114, and/or Form 8300? If you do not report any categories, please explain and identify which categories of digital assets are reported and which are not reported on each of these forms.
- Do FATCA, FBAR, and/or 8300 reporting requirements need clarification to remove ambiguity as to whether they apply to all or some categories of digital assets? Why?
- Given the policies behind FBAR and FATCA, should digital assets be further integrated into these reporting regimes? Are there barriers to doing so? What are they?
- How do stakeholders consider wallet custody when determining FATCA, FBAR, and Form 8300 compliance requirements? Identify the types of arrangements to which this reporting requirement should or should not apply.
Evaluation and Demonstration (IRC Section 170)
- Currently, digital assets are not subject to the IRC Section 170(f)(11) exemption for exchange-ready-valued assets. Should the proof rules change to take account of digital assets? If so, how and to what types of digital assets? Do I need to do something different about it?
- What are the characteristics of exchanges and digital assets to which this exemption is appropriate and why?
The Commission will collect responses to these questions on a regular basis until September 8, 2023. Stakeholders are invited to submit electronic copies of their responses to the following questions to the Committee staff below. Reply @finance.senate.gov. If we have any questions regarding your responses, committee staff will contact you directly.
Thank you for your kind reply.
Sincerely,
Ron Wyden
Finance Committee Chair
Mike Crapo
Finance Committee Ranking Members
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Press: Ryan Carey (Wyden) / Mandy Crichfield (Krapo)
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