On June 7, 2022, United States Senators Kirsten Gillibrand (D-NY) and Cynthia Lummis (R-WY) introduced the Lummis-Gillibrand Responsible Financial Innovation Act (the “Act”), a comprehensive legislative framework for the regulation of cryptocurrencies that includes important tax relief measures. The tax proposals introduced by Sections 201-206 and 208 of the Act are described below.
Untaxed Crypto Participation Until Disposal (Second. 208.)
The Act would establish that digital assets generated from mining and staking activities are not subject to tax at the time of creation, but are instead excluded from gross income until the disposal of those assets. This position would repudiate Notice 2014-21 and more closely align with that of the taxpayer in Jarrett vs. USAdiscussed here in a previous issue of BrassTax. The proposed effective date is December 31, 2022.
Small personal crypto transactions are exempt from tax (Second. 201.)
The law includes a de minimis exception that would exclude from gross income up to $200 (adjusted for inflation) of gain or loss recognized by the “virtual currency” provision, subject to an aggregation rule. This exception only applies with respect to personal transactions for the purchase of goods or services, and does not apply when virtual currencies are exchanged for cash, cash equivalents, digital assets, or other securities or commodities. The proposed effective date is December 31, 2022.
Commodity Trading Safe Harbor Expanded to Include Certain Cryptocurrencies (Second. 203.)
The Act would make it clear that proprietary trading in certain digital assets is covered by the trading safe harbor under Section 864(b). This is a clarification that the crypto industry has long requested and that the Treasury Department and the Internal Revenue Service (the “IRS”) have been hesitant to address, discussed here in a previous edition of BrassTax. The proposed effective date is December 31, 2022.
Crypto loans are generally not taxable (Second. 205.)
The Act makes it clear that digital asset lending agreements are generally non-taxable events. This treatment generally aligns with President Joe Biden’s proposal, discussed here in a previous edition of BrassTax. The proposed effective date is December 31, 2022.
Limiting the scope of the crypto tax return by restricting the definition of “broker” (Second. 202.)
The Act would clarify and restrict the crypto reporting regime to persons engaged in the “ordinary course of a trade or business” from conducting sales transactions for “customers.” This would likely exclude cryptocurrency miners, validators, and software and hardware developers from the tax reporting regime. The proposed effective date is December 31, 2025.
DAOs are required to file tax returns (Second. 204.)
The Act would classify decentralized autonomous organizations (“DAOs”) by default as “business entities” if the DAOs are “duly incorporated or organized under the laws of a State or foreign jurisdiction as a decentralized autonomous organization, cooperative, foundation, or any entity Similary”. .” This would make it clear that entities that qualify as DAOs are subject to tax filing requirements. The proposed effective date is December 31, 2022.
Hard one-year deadline for IRS to provide tax guidance on many pesky crypto tax issues (Second. 206.)
The Act urges the IRS to adopt additional guidance within a year regarding other long-standing issues in the digital asset industry, including: forks and airdrops; commercial acceptance of digital assets; digital asset mining and staking; charitable contributions of digital assets; and the characterization of payment stablecoins as indebtedness. The proposed effective date for the adopted guidance is December 31, 2023.