Senate Finance Committee Leaders Seek Clarity on Tax Treatment of Digital Assets

Senate Finance Committee Chair Ron Wyden (D-OR), and Ranking Member Mike Crapo (R-ID) posed policy questions to members of the digital asset community "to better understand how Congress can address the tax challenges and opportunities presented by digital assets." Both legislators emphasized the need for clear guidance.

In a bipartisan effort, the Senators highlighted the absence of direction in existing federal tax law which categorizes taxation based on types of property. To begin the process of creating an appropriate tax structure for digital assets, the Senators posed questions grouped into different categories:

Marking-to-Market for Traders and Dealers (IRC Section 475):

• Should traders and dealers of digital assets be allowed or required to mark to market?
• Should the treatment depend on the type of digital asset and how should actively traded digital assets be determined?

Trading Safe Harbor (IRC Section 864(b)(2)):

• When should the policies behind the trading safe harbor apply to digital assets and which specific section should apply?
• Should a new trading safe harbor be established for digital assets, and if so, should additional limitations apply?

Treatment of Loans of Digital Assets (IRC Section 1058):

• What types of digital asset loans exist?
• If IRC Section 1058 applied to digital assets, what compliance challenges would arise, and should it include all digital assets or only a subset?

Wash Sales (IRC Section 1091):

• In what situations do taxpayers claim economic substance in wash sales involving digital assets?
• Are there existing best practices for reporting wash-sale-equivalent transactions in digital assets?
• Should IRC Section 1091 apply to digital assets and should it extend to other assets?

Constructive Sales (IRC Section 1259):

• In what situations do taxpayers claim economic substance in constructive sales involving digital assets?
• Are there existing best practices for reporting constructive-sale-equivalent transactions in digital assets?
• Should IRC Section 1259 apply to digital assets and should it extend to other assets?

Timing and Source of Income Earned from Staking and Mining:

• What are the various types of rewards provided for mining and staking?
• How should returns and rewards from mining and staking be treated for tax purposes?
• Should income from mining and staking be characterized and timed in the same manner?
• What factors determine whether an individual is participating in mining or staking as a trade or business?

Nonfunctional Currency (IRC Section 988(e)):

• Should a de minimis nonrecognition rule, similar to IRC Section 988(e), apply to digital assets?
• What threshold would be appropriate and what measures could prevent tax avoidance?

FATCA and FBAR Reporting (IRC Sections 6038D, 1471-1474, 6050I, and 31 U.S.C. Section 5311 et seq.):

• When and how should taxpayers report digital assets or transactions on FATCA forms, FBAR forms and Form 8300?
• Should reporting requirements be clarified to eliminate ambiguity and should digital assets be more integrated into existing reporting regimes?
• How should wallet custody arrangements be considered when determining compliance requirements?

Valuation and Substantiation (IRC Section 170):

• Should substantiation rules be modified to account for digital assets, and if so, how?
• What characteristics would qualify a digital asset and its exchange for the IRC Section 170(f)(11) exception?

The Committee requested responses to these questions before September 8, 2023 from all digital asset "experts, stakeholders and interested parties."