The Biden administration’s crypto tax proposal last year contained some helpful clarifications, including supporting non-recognition treatment for crypto lending, along with measures aimed at gaining insight into the crypto market, such as expanding FATCA and reporting foreign financial assets into the crypto space, as summarized here. This year, the Biden administration has kept last year’s crypto content, but added a proposal to expand wash sale rules to crypto and a climate-focused proposal that uses a 30% excise tax on crypto mining as a measure to reduce associated energy costs. (See of the Ministry of Finance General explanations of the administration’s proposal for income for the financial year 2024 (“The Green Paper,” available here). While the future of the Biden administration’s proposal is unclear in a period of divided government, the recent turmoil in the crypto industry, combined with the perceived need for more clarity on current rules, may create some opportunities for bipartisan consensus in this area. Here is a brief overview of the crypto proposals in the Greenbook:
New proposals for FY 2024:
- Apply the wash sale rules to cryptocurrency. Under this proposal and similar to rules for stocks and securities, retail investors and dealers of digital assets will not be able to claim losses on digital assets that were sold and then bought back within a 30-day window (a “wash sale”). Instead, the transactions will be consolidated into one transaction, and the holder will recognize losses only upon the subsequent sale of the subsequently acquired cryptocurrencies.
- Impose a 30% excise tax on the mining of cryptocurrency and other digital assets. This proposal will be used to mitigate the negative environmental impact of so-called proof-of-work validation of blockchains (“mining”) by encouraging cryptocurrencies and other digital assets to move to an alternative validation mechanism such as proof-of-stake, which uses significantly less energy. Mining companies will be subject to an excise duty of up to 30% of the cost of the electricity they use in mining. The proposed excise tax will apply regardless of whether a miner actually receives any reward for his efforts. This is because the excise tax applies to electricity used in mining regardless of whether the miner receives a reward for being the first to validate a relevant blockchain. The tax will be phased in over a three-year period (e.g. 10% in 2024, 20% in 2025 and 30% from 2026 onwards).
Proposal carried over from FY 2023:
- Use non-recognition rules that apply to securities lending for cryptocurrencies. Under this proposal and similar to rules for stocks and securities, the lending of actively traded digital assets, including certain cryptocurrencies, will not result in a recognition event upon either transfer to the borrower or return to the lender, where (i) the digital asset is returned to the lender at the end of the loan, (ii) the lender takes into account amounts derived from the digital assets, such as additional tokens from airdrops or hard forks, as if it held the digital assets directly throughout the life of the loan, and (iii) the lender retains the risk of loss or the possibility of gain on the digital assets throughout the life of the loan.
- Allow dealers or traders of cryptocurrency and certain digital assets to opt for mark-to-market processing. Current law allows commodity dealers and securities or commodity traders to elect to use the mark-to-market method (generally recognizing ordinary gains or losses annually based on the change in the value of such securities or commodities). This proposal would allow dealers and traders of actively traded digital assets (as determined by the Treasury Department) and derivatives on or hedging of such assets to elect to use the mark-to-market method. That is, this proposal would recognize actively traded digital assets as a third category of assets eligible for a mark-to-market election, rather than categorizing them as securities or commodities.
- Require cryptocurrency brokers to report information about transactions and foreign owners. Under this proposal, certain digital asset brokers, including cryptocurrency exchanges, would be required under FATCA to report information about cryptocurrency transactions such as gross proceeds, as well as the identity of certain significant foreign owners who hold their interests through so-called passive entities, to the United States. Information collected about these transactions may be exchanged with foreign authorities.
- Extend the mandatory disclosure requirement for holders of certain foreign financial assets to include digital assets. Individuals filing a U.S. tax return who have foreign financial assets valued in the aggregate at more than $50,000 must report on Form 8938 certain information, including information about where the assets are held and account information. This proposal would expand the scope of foreign financial assets to include accounts with digital assets.
