Episode 36: New Proposals for Digital Assets
Welcome back to “Tackling Tax,” where we’ll bring you the latest on tax policy and strategies—in an easy-to-understand format. Whether you’re looking to learn more about tax bills, global tax implications, or planning insights for your business, you’re in the right place.
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In this episode, we’ll discuss new proposals for digital assets and how those assets are being taxed today. We welcome Howard Wagner with our Washington National Tax Office to share his insights.
If you have any questions or need any assistance, please reach out to a professional at Forvis Mazars.
Transcript
IRIS LAWS
This week, we welcome back one of our own, Howard Wagner, to talk with us about new proposals with digital assets. From your one stop for tax updates and analysis, I’m Iris.
LANCE JACOBS
And I’m Lance.
IRIS LAWS
And this is “Tackling Tax.”
Howard Wagner is with us this week, a colleague with Lance and I here at the Washington National Tax Office. So, Howard has over 35 years of accounting and tax experience. He focuses mostly on corporate tax, global transaction structuring, taxation of debt instruments, the list goes on and on, including things like, you know, tax attributes in corporate transactions and bankruptcy across, you know, a variety of industries.
IRIS LAWS
So, he’s a wealth of knowledge and we’re really excited to have him today. He also serves as a Forvis Mazars section 1202 practice leader, which I’ve gotten to work with him on. So, welcome back to the pod, Howard.
HOWARD WAGNER
Thanks.
IRIS LAWS
So, I know there’s a lot we could talk about with digital assets, right? I mean, it’s what everybody is talking about, both on the Hill and off the Hill. But this is a tax podcast, right? So, let’s focus on maybe just the tax aspects today. Could you give us some background as to current state? You know, how are digital assets being taxed today?
HOWARD WAGNER
Yeah. You know digital assets can mean a lot of things. It could be virtual currency, it could be crypto, it could be Bitcoin, it could be NFTs, any variety of things. You know, unfortunately we have a notice out there from 2014 that basically just says digital assets are property. It doesn’t say that they’re securities for tax purposes. It doesn’t say that, you know, they are treated like securities in a lot of common transactions.
So, unfortunately, we have a very broad framework that was issued, you know, 12 years ago. The digital asset world has expanded significantly beyond the very early, you know, Bitcoin and the few things we had in 2014. Digital assets are being used in a variety of ways. And the Internal Revenue Code just hasn’t caught up yet. In essence, it doesn’t treat crypto or digital assets any different than a piece of land.
So, there are advantages to that and disadvantages to that. You know, like I said, they just haven’t caught up the system to how people are using it today and it creates traps, opportunities, and just a lot of holes that need to be addressed so people can have some certainty on a prospective basis.
LANCE JACOBS
So, Howard, we’ve heard support from both sides of the aisle on this topic in terms of changes. What about the current state might those in Congress not like or be open to reforming?
HOWARD WAGNER
Thanks, Lance. I think it’s interesting here because when you look at this bill, there’s a lot of balance here. There’s some certainty in the code for a lot of common transactions, stablecoins, things like that, that are becoming more and more relevant in our day-to-day lives. There’s also some things where they’re treating digital assets more like securities, more like things, you know, you buy on the stock market, and there’s things that apply to securities that right now don’t apply to digital assets.
For example, if I have a stock that I have at a loss, if I sell it, take a loss, and then buy the same stock right back, I can’t take that loss because digital assets aren’t treated in a manner similar to stock market assets, where such treatment would be appropriate. You can still go ahead and harvest those losses without having to worry about wash-sale rules kicking in and disallowing it.
So, on one hand, they’ve given the crypto industry some of what they wanted and some tax certainty in things and how we deal with things. But at the same time, they’ve, in my mind, in a lot of cases, appropriately treated it similar to stock market assets, so that some of the anti-abuse provisions that apply to stock market assets would apply to a lot of widely traded digital assets under this new proposal, under the legislation that’s working its way through. So, it’s actually pretty balanced.
LANCE JACOBS
So, that brings us to the hot topic of the moment, which is the passage of H.R. 10357, the Digital Asset Tax Certainty Act, out of the Ways and Means Committee. There’s a lot in this bill, and too much to go through on the podcast, but give us the high notes, if you will. What are maybe the top three or four most influential proposals in your mind?
HOWARD WAGNER
Yeah, I think I want to kind of address it in the context of what are the major themes of the bill. So, from a parity standpoint, if it looks like it trades like a stock or bond or things that are commonly traded, it’s going to be subject to the same rules that those publicly traded assets are going to be traded on.
We’re not going to have—the dichotomy that we have now is that you can trade stocks on an exchange and they’re subject to one set of rules, and you can trade digital assets on an exchange and they’re subject to a different set of rules. They’ve really harmonized them quite a bit.
IRIS LAWS
So, I mean this sounds like it could impact people outside of just like banking, right? Like, this could impact anyone sort of involved, with digital assets on a personal basis too. You know, that being said, just because it might be impactful doesn’t necessarily mean there’s something to do yet, right? It’s still in, you know, still in the House, whatnot, as of the recording of this podcast.
So, can you speak to whether there are any maybe like action items or, any points that you might recommend our listeners getting with their advisors on at this point?
HOWARD WAGNER
Yeah. You know, I think what I would do is I would understand what my activities are. What am I doing? What have I historically done? How have I historically treated those assets or those transactions? Understand if the treatment is going to be the same, if I’m going to have a different treatment, if I’ve got optionality as to what the treatment of the various assets are. I think it’s really just a question of preparation.
I think it’s clear that there’s going to be some resolution, hopefully sooner as opposed to later, on getting some certainty and getting some harmonization. For example, when you look at this legislation and also some of the legislation in the Senate that was introduced a few days ago. They’re all going in a similar direction and saying, look, you’re going to be subject to the wash-sale rules. Those are the ones that prevent you from harvesting losses. You’re going to be subject to these rules on conversion transactions, rules that prevent you from monetizing appreciated stock without recognizing the gain. They’re going to extend that to various digital assets.
Other things they’re going to do to kind of harmonize, for example, if you give publicly traded stock to a charity, you don’t need to get an appraisal. If you give a digital asset to a charity, right now that requires an appraisal because it’s not publicly traded stock. They’re harmonizing that to make them similar. So, you know, a lot of the stuff it’s what have I historically done and what’s the difference going to be in the future?
I think the real thing to consider is this; is under the House bill, there’s three very specific provisions which could be viewed as anti-abuse provisions. And I’ve kind of mentioned them already. One is the wash-sale rules. The second is the conversion transactions. And the third is something known as the straddle rules which basically say you can’t take a loss on one property if you got offsetting gain on another property that’s substantially similar.
In the House bill, those had an effective date of September 14, the day the bill was introduced. And the reason for that is when they come out with legislation that says, no, you can’t do this anymore, we want to put a stop to something, it’s not uncommon for them to make it an effective date based on what it’s introduced so people don’t have the ability to do as much of that as possible before anything passes.
But, I mean, I think the biggest impact when you think about who has to get ready, it’s for the people who are investors in digital assets doing a lot of trading, or partnerships and hedge funds doing a lot of trading in digital assets. I think the train has kind of left the station that you can probably expect that the wash-sale rules are going to apply to you.
Those are complicated and difficult to comply with, and you want to start thinking about what you’re going to need from a system standpoint to track that, whether your current service providers that are doing that are going to have something for you, or if you’re going to need to come up with your own software to do it.
I think the other question is, if you’re communicating with your investors, do you want to start the conversation about the possibility for legislation that has an effective date of September 14 of this year, even though it doesn’t pass until later, just to help manage expectations that that’s a possibility?
LANCE JACOBS
Interesting. And you kind of touched on this, and I had a follow up question on specifically what’s going on in the upper chamber of the legislature, specifically with respect to the Senate.
I know they just went on recess. To the extent that they have parallel legislation, what’s the status of that? Is that something that would be picked up in the lame duck? Is it fully baked, partially baked, not baked at all? And what differences do you see or expect to see?
HOWARD WAGNER
It’s hard to say. So, the Senate bill that was introduced a few days ago was introduced by Senator Steve Daines. He has been active in some of these discussions over the years, but he’s retiring at the end of this session. The bill has been introduced in the Senate. Nothing else has happened to it. Everybody’s gone home until the midterms.
I think there’s enough uncertainty over the midterms that nobody really knows what’s going to get done from the midterms until the new Congress is seated in January. I think directionally the bills are similar. They’re not identical. But on the big picture items, they’re going in the same directions. Minor difference, you know, minor differences. Some things in the House bill, not in the Senate bill and vice versa, but they’re all going in the same direction.
LANCE JACOBS
And to your point, if this doesn’t get passed, reconciled and passed, during the lame duck, in the new Congress, this would have to be reintroduced on both sides, essentially.
HOWARD WAGNER
I believe that’s the case. But the bill that was passed on by the House Ways and Means Committee had really unusual bipartisan support for today’s environment. It was passed by a vote of 38-to-5. It’s kind of impressive with where things are today that there’s that much bipartisanship on getting a bill done because, you know, the system is just not working the way it is. And I think everybody recognizes something needs to be done.
LANCE JACOBS
Super interesting stuff there, Howard, and we’re going to have you back if this makes more progress or even when it passes and you and I can get into it deeper. I know you’re a former state guy, we can talk about the state impacts of this legislation as well. So, thanks again, Howard. We’ll talk to you soon.
HOWARD WAGNER
Thanks a lot.
IRIS LAWS
And that’s our show. Thanks for joining. Remember to subscribe and listen in for the next episode of the podcast. Until next time.
ANNOUNCER
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