SIFMA Seeks IRS Guidance on Withholding Rules for Digital Asset ETFs

In its supplemental letter, SIFMA stated that the rapid growth of digital asset ETFs heightened the importance of these issues, particularly the need for IRS guidance on the treatment of "incidental assets" (such as "airdrops" and "hard forks") and on the tax implications of staking rewards earned by ether ETFs. The association stressed that clear, administrable rules are essential for brokers and investors.

SIFMA identified several areas needing clarification:

1. Abandonment Rights of Incidental Assets. SIFMA said it is currently unclear whether ETFs that preemptively abandon rights to incidental assets should be treated as having avoided taxable income for the fund or its investors. SIFMA said that even if the IRS pursues "de minimis" relief for small receipts of digital assets (as recently recommended by the President’s Working Group), such relief may not be workable for ETFs with thousands of investors, underscoring the need for clear abandonment guidance.
2. Character and Source of Income. SIFMA questioned how income from airdrops, forks, and staking rewards should be characterized, and whether they should be sourced to the residence of the investor—given that identifying a payer or geographic nexus is typically impractical.
3. Reliance on Grantor Trust Reporting. SIFMA asked whether brokers can rely on grantor trust information statements to determine if incidental asset income exists, particularly when abandoned assets do not appear on statements.
4. Timing of Withholding. SIFMA seeks guidance on how withholding obligations should apply when grantor trust statements are issued after the relevant tax year and when brokers may no longer hold customer assets.
5. Staking Rewards. SIFMA said that ETF issuers asked the SEC to allow staking of ether held by ETFs, raising character, source, and timing questions as to these incidental assets. SIFMA urged the IRS to clarify whether tax treatment depends on the form of staking (direct staking, staking via exchanges, or liquid staking tokens). SIFMA also flagged competing views on when income arises—whether upon receipt of staking rewards, or only when rewards are disposed of, akin to the treatment of personal property under IRC § 865(a)(2) ("Source rules for personal property sales").
6. Prospective Application. SIFMA asked whether any new guidance should apply only prospectively and suggested a moratorium on withholding until rules are finalized and a transition period is set for compliance. SIFMA pointed to prior Treasury and IRS practice with new financial products—such as cross-border interest rate swaps and qualified fails charges—as precedent for a forward-looking approach.

SIFMA cautioned that the absence of clear rules creates significant compliance challenges, particularly for brokers dealing with non-U.S. investors and novel digital asset income streams. SIFMA also urged Treasury and the IRS to ensure that any guidance issued is practical, administrable, and avoids retroactive application.