Why Congress Is Considering Crypto Tax Reform
Cryptocurrency has evolved from a niche investment into a significant asset class, while tax rules governing digital assets remain relatively undeveloped. The IRS has issued guidance and implemented reporting requirements in recent years; however, comprehensive legislation is now starting to emerge as digital assets become increasingly common in investment portfolios and commercial transactions.
Under current federal tax law, digital assets are generally treated as property, meaning taxpayers may recognize gain or loss when cryptocurrency is sold or exchanged. While this framework provides a basic foundation for taxation, it can create significant compliance challenges. Existing tax rules do not always fit neatly with common digital asset activities, including stablecoin transactions, staking and mining rewards, charitable contributions, and other uses. As digital assets become more mainstream, the practical challenges have become increasingly burdensome. The following sections are key areas of proposed legislative reform.
Insight from Forvis Mazars: Perhaps the most significant development related to digital asset taxation is the bipartisan consensus that the current regulatory framework is insufficient. Historically, digital asset legislation has struggled to gain traction as lawmakers debated the broader role of crypto assets in the financial system. Currently, the emerging legislative framework reflects an effort to normalize digital assets within the existing system rather than create a separate regime.
Simplifying Digital Asset Transactions & Reporting Requirements
Congress has increasingly focused on the compliance burdens associated with routine digital asset transactions. The Less Tax Paperwork for Digital Asset Owners Act (H.R. 9178) would simplify taxation by:
- Excluding gain or loss on certain network fee transactions, e.g., gas fees.
- Excluding gain or loss on regulated U.S. dollar stablecoins. Gain or loss on “qualified U.S. dollar stablecoins” can be excluded if they are purchased for at least 99.5% of their redemption value and sold for a price within 0.5% of that redemption value.
- Allowing taxpayers to elect a simplified accounting method for digital assets. The accounting method change election would permit taxpayers to determine gain or loss using an annual net calculation for certain widely traded digital assets, reducing the need to track and report every individual transaction. The resulting gain or loss would be treated entirely as a short-term gain or loss.
Insight from Forvis Mazars: What may be most interesting about this bill is what it does not do. Crypto advocates have long pushed for a de minimis exemption that would allow taxpayers to use cryptocurrency for everyday purchases without triggering taxable gain or loss. H.R. 9178 stops well short of a broad de minimis exemption.
Tax Treatment of Mining & Staking Rewards
Current law generally requires taxpayers to recognize ordinary income when mining or staking rewards are received, even if the taxpayer has not sold the newly created digital assets. This can create liquidity concerns by imposing tax before the taxpayer has converted the asset to cash and may also create challenges for founders staking tokens as the market might interpret founders selling tokens as something other than a mechanism to pay a tax bill. The Tax Clarity for Mining and Staking Act (H.R. 9175) would clarify that newly minted digital assets are included in income at the fair market value at the time of the acquisition but would allow taxpayers to elect to defer taxation of certain newly minted digital assets until a later taxable event, aligning taxation with asset disposition rather than creation. Taxpayers making this election would recognize dispositions of newly minted digital assets at ordinary income rates.
Insight from Forvis Mazars: The debate surrounding mining and staking rewards highlights a fundamental question that extends beyond digital assets: when should newly created value become taxable? One view is that newly minted digital assets are similar to self-created property and, therefore, should not be taxed until a disposition event occurs such as manufactured inventory. Another view is that allowing deferral would depart from the treatment of many other forms of income such as wages, interest, or stock compensation, which are generally taxed when received.
Charitable Contributions of Digital Assets
Currently, taxpayers donating digital assets may face appraisal and substantiation requirements that can be more burdensome than those applicable to donations of publicly traded securities. The Charitable Deductions for Digital Asset Donations Act (H.R. 9173) would simplify these rules by eliminating certain appraisal requirements for widely traded digital assets, aligning their treatment more closely with donations of publicly traded stock.
Insight from Forvis Mazars: Publicly traded securities generally receive simplified substantiation treatment because markets provide readily observable values. By extending similar treatment to widely traded digital assets, Congress appears to be acknowledging that certain cryptocurrencies have achieved a level of market maturity that may justify similar treatment and no longer require a qualified appraisal to be included with a taxpayer’s return.
Aligning Digital Assets With Traditional Financial Transactions
The Providing Analogous Rules for Digital Assets (PAR) Act (H.R. 9176) would apply certain tax rules currently available for traditional financial institutions to analogous transactions involving digital assets. Changes would include:
- Digital asset lending transactions would receive tax treatment similar to securities lending arrangements, e.g., Internal Revenue Code (IRC) 1058
- Dealers and traders in widely traded digital assets could elect mark-to-market accounting, e.g., IRC 475
- A safe harbor for foreign persons trading in digital assets in a manner similar to existing trading safe harbors for securities, e.g., IRC 864
Insight from Forvis Mazars: Many of these proposals are simply expanding the definition of rules written for “securities” in the IRC; however, while other government agencies may define certain digital assets as securities, digital assets are not defined as securities within the IRC. By extending similar treatment to digital assets, Congress appears to be acknowledging that the IRC should be amended so that digital assets and securities are treated with more parity. The Joint Committee on Taxation (JCT) estimates this act would raise $1.362 billion in revenue over 10 years.
Applying Traditional Anti-Abuse Rules to Digital Assets
The Applying Existing Tax Anti-Abuse Rules to Digital Assets Act (H.R. 9172) would extend several existing tax concepts to digital assets, including rules relating to wash sales, constructive sales, and certain lending transactions. A wash sale generally involves selling an asset at a loss and repurchasing the same asset shortly thereafter, while a constructive sale generally involves using offsetting transactions to lock in gains without actually selling the asset. By aligning the treatment of digital assets with established tax rules applicable to other financial assets, the proposal seeks to reduce perceived disparities, limit opportunities for tax-motivated transactions, and provide greater consistency across investments.
Insight from Forvis Mazars: The JCT estimates this act would raise $2.074 billion in revenue over 10 years.
Voluntary Disclosure & Digital Asset Compliance
The rapid growth of digital assets has complicated taxpayers’ ability to comply with an evolving and increasingly complex tax framework. The Digital Assets Voluntary Disclosure Program Act (H.R. 9174) would establish a formal voluntary disclosure program allowing eligible taxpayers to correct past digital asset tax noncompliance. Taxpayers would generally be required to file amended returns and pay any deficient taxes and interest. In exchange, eligible taxpayers could receive reduced penalties and a streamlined path toward resolution.
Insight from Forvis Mazars: The IRS Voluntary Disclosure program has historically not been tailored to digital assets and some argue that challenges with completing Form 14457 specific to digital assets may deter taxpayers from coming forward.
Preventing Cross-Border Tax Avoidance
The End Digital Assets Tax Shelters Act (discussion draft) would limit planning strategies that allow taxpayers to avoid U.S. tax on digital asset gains by relocating to a low-tax foreign jurisdiction before selling their holdings. Under the proposal, a U.S. citizen or resident could continue to be treated as a U.S. resident for sourcing purposes when selling digital assets if they were a U.S. resident during any of the preceding 10 taxable years, unless they actually pay foreign income tax equal to at least 10% of the gain.
How Forvis Mazars Can Help
While the ultimate fate of these proposals remains uncertain, the volume and bipartisan nature of legislative activity demonstrate that Congress is taking digital asset taxation more seriously than ever before. Professionals at Forvis Mazars continue to monitor legislative, regulatory, and administrative developments affecting digital assets. Contact us to learn more.