A highly anticipated crypto regulation bill is generating buzz and gathering support from lobbying groups for its reforms to a topic that’s long been a sore spot for investors in digital assets: taxes.
A draft version of the bill, set to be introduced by Sens. Cynthia Lummis and Kirsten Gillibrand next Tuesday, has been circulating. Though Lummis has warned that the draft, dated March 1, is “outdated,” the language is giving some hope that the bill will give them the clarity they’ve been asking Congress and the Internal Revenue Service for.
The passage of the Infrastructure Investment and Jobs Act last year has created more urgency for crypto tax reform. Industry lobbyists tried and failed to prevent broad language requiring “brokers” to report crypto transactions for tax purposes starting in January 2023.
Kristin Smith, executive director of the Blockchain Association, highlighted this issue in April, and said she hoped Congress would clarify that “brokers” meant centralized exchanges for reporting.
Though the IRS has said it wouldn’t go after software developers, miners or others technically involved in crypto transfers based on that language, the Lummis-Gillibrand bill draft offers the specific exemptions the industry asked for. While it doesn’t narrow the definition to centralized exchanges, it excludes developers of hardware and software wallets, transaction validators and people developing digital assets for use by others, provided that they’re not customers of the developer.
Another clause in the bill, the “de minimis exception,” would bring taxation of smaller personal transactions on par with the treatment of gains from exchanging foreign currencies. That could be a boon for everyone from NFT gamers, who currently face complex accounting on small transactions, to retailers that want to accept cryptocurrency at the point of sale.
Vera Tzoneva, chief operating officer of crypto tax service CoinTracker, said it’s been working with the Lummis-Gillibrand teams to help with that tax clause. The exemption could mark a major step toward more mainstream crypto adoption as “the natural next progression for cryptocurrency is its use for payments,” and the inclusion of the clause is “a great step in the right direction for the industry.”
In other words, it could help you buy Chipotle with bitcoin.
Another clause assures that crypto lending agreements would be taxed along the lines of existing rules for security-based loans, where no gain or loss would be realized in the exchange. The bill also delegated authority to the Treasury Department to classify “forks, airdrops, and similar subsidiary value as taxable.” Within a year, the Treasury Secretary would have to rule on when receiving crypto rewards is a taxable event.
The final version of the bill introduced on June 7 might well differ from the March draft, though many of the provisions match statements Lummis has made about her plans for the bill in recent months. The more important question may be whether the slow-churning wheels of Congress can match the fast pace of Web3 innovations, which might require more clarification or new rules by the time any bill nears final passage.
Gillibrand has said that she is “optimistic” about the passing of the bill, and expects to get a Senate vote by next year at the latest. She stressed the importance of “[getting] it right the first time,” and that “the best thing [they] can do for all these businesses is to bring clarity.”
