Recent legislative action suggests that Congress is eager to resolve many unanswered crypto tax issues.  On July 11, 2023, Senators Ron Wyden and Mike Crapo released an open letter to the “members of the digital asset community and other interested parties,” requesting comments on a number of open crypto tax issues. On July 12, 2023, Senators Cynthia Lummis and Kirsten Gillibrand reintroduced a revised version of the Lummis-Gillibrand Responsible Financial Innovation Act (the “Act”, reproduced here) containing newly proposed crypto tax legislation and reintroducing crypto tax provisions from the 2022 version of this bill. Both the requests for comments from Senators Wyden and Crapo and the reintroduced legislation by Senators Lummis and Gillibrand signal that changes may be on the horizon for crypto taxation.

Wyden-Crapo Request for Comments

The request for comments, which was released concurrently with a Joint Committee on Taxation report (the “JCT Report”) identifying and describing various unresolved crypto tax issues, represents a bipartisan effort to address crypto tax uncertainties. Senators Wyden and Crapo and the Joint Committee on Taxation requested comments on the application of tax provisions to cryptocurrency in the following contexts: the trading safe harbor, mark-to-market elections, crypto lending, and wash sales, to name a few. The full text of the open letter and the JCT Report are reproduced here and here respectively.

Crypto Tax Provisions of the Act

Notably, many of the issues raised by Senators Wyden and Crapo and the JCT Report are addressed in legislation proposed by Senators Lummis and Gillibrand, including, among others, application of the trading safe harbor, mark-to-market elections, crypto lending, and wash sales.  

The following crypto tax provisions are newly introduced by the Act:

• Section 805 (Wash Sales) modifies the existing Section 1091 wash sale rules to apply to certain crypto asset sales, thereby limiting crypto investors’ ability to claim current losses following the sale and acquisition of substantially identical crypto assets.
• Section 806 (Mark-to-Market) defines commodity for purposes of the mark-to-market rules to include crypto assets, thereby allowing dealers and traders in commodities to elect to use the mark-to-market accounting method.
• Section 807 (Characterization and Recognition of Income Following Forks and Airdrops) clarifies that crypto assets that are received following forks or airdrops do not result in gross income to the taxpayer until “the taxpayer takes affirmatives steps related to the control of the asset,” and characterizes the resulting income as ordinary income.

Additionally, the Act reintroduces the following crypto tax provisions from the 2022 legislation (see our comments on the 2022 legislation here):

• Section 801 (De Minimis Exclusion) exempts from gross income up to $200 (adjusted for inflation and subject to an aggregation rule) of gain or loss recognized from the disposition of crypto assets with respect to personal transactions for goods or services.
• Section 802 (Crypto Tax Reporting) curtails crypto tax reporting by narrowing the definition of “broker” for purposes of the reporting rules applicable to digital asset brokers to include only persons engaged in the “ordinary course of a trade or business” of effecting sales transactions for “customers”.
• Section 803 (Commodities Trading Safe Harbor) expands the commodities trading safe harbor to include trading for one’s own account in certain crypto assets under Section 864(b).
• Section 804 (Crypto Lending) provides that crypto lending agreements are generally non-taxable events.
• Section 808 (Crypto Staking and Mining) provides that crypto assets generated from mining and staking activities are not taxable upon creation, but rather are excluded from gross income until the disposition of such assets.