Tax reform, like spring, is in the air. The Biden Administration recently released its fiscal year 2025 revenue proposals, known as the annual “Greenbook.” The Greenbook’s 250+ pages of tax reforms include six potential changes to modernize U.S. federal income tax law for digital asset ownership and transactions are described below.

LEGAL TOKENS

I. New Tax on Mining Income

The Greenbook includes a new tax proposal that will apply to any business “using computing resources, whether owned by the firm or leased from others, to mine digital assets.” The proposal, if adopted, imposes an excise tax equal to 30% of electric costs used in digital asset mining. Mining companies that produce their own electricity will also be subject to this tax based on estimated electric costs. Estimating electric costs and apportioning electric costs between mining activity and other non-mining business activities remains unclear.

II. Wash Sales

Presently, wash sale rules prevent taxpayers from claiming a capital loss upon selling stock or securities if the taxpayer repurchases the same or substantially identical stock or securities within 30 days. For these purposes, stocks and securities are defined somewhat narrowly under the applicable statute and seemingly exclude many digital assets, including most prominently Bitcoin and Ethereum. Therefore, taxpayers can harvest tax losses by selling and repurchasing Bitcoin under present law and still claim a capital loss on their tax returns.

The Greenbook expands the wash sale rules’ applicability to “digital assets,” meaning any (i) digital representation of value which is (ii) recorded on a cryptographically secured distributed ledger or similar technology. If adopted, taxpayers recognizing losses on the sale or disposition of digital assets will be subject to the wash sale rules if identical or substantially identical digital assets are repurchased within 30 days of the initial sale.

III. Lending Digital Assets

Current U.S. federal income tax law specifically deems securities lending a nontaxable event. Like the wash sale rules, U.S. federal tax laws governing securities lending narrowly define securities and do not (yet) include digital assets.

The Greenbook proposals amend the securities lending tax rules to include actively traded digital assets. Certain non-actively traded digital assets may also be included, subject to further administrative guidance and regulations from the IRS. Whether this proposal will also apply to short sales is unclear.

IV. Information Reporting by Certain Financial Institutions and Brokers

Code¹ Section 6038D requires taxpayers to report certain interests in foreign financial assets with their annual tax returns. This existing rule has two categories of reportable information: (1) financial accounts maintained by a financial institution and (2) certain specified assets not held in a financial account maintained by a financial institution. The Greenbook proposal on information reporting expands the types of reportable assets by an additional category: accounts holding digital assets that are maintained by a foreign asset exchange or service provider.

Including “foreign digital asset accounts” in Section 6038D reporting would require brokers and exchanges to report gross proceeds from sales, customer account information, and the substantial foreign owners of certain trusts or other passive entities. The proposal allows the United States to share this reported information with other foreign governments pursuant to existing information exchange agreements with partner jurisdictions.

V. Foreign Digital Asset Account Reporting by Digital Asset Owners

Pursuant to the above reporting requirements, taxpayers are required to file IRS Form 8938 (Statement of Specified Foreign Financial Assets) to report interests in certain foreign financial assets with aggregate value in excess of $50,000. The new Greenbook proposal expanding the reporting categories would in turn expand the Form 8938 filing requirements to include foreign digital asset accounts as well. Reporting obligations would be based on where the exchange or service provider is organized or established. How this change may apply to or impact unincorporated DAOs (noting that certain DAOs may be formed under local corporate law) is not yet clear.

VI. Mark-to-Market Elections

Under Code sections 475(f)(1) and (f)(2), a taxpayer that trades (as opposed to invests) may make separate elections to mark its open securities or commodities positions to market values at the end of each year. The author historically has interpreted the term “commodities,” which is defined as any actively traded personal property, to include of many actively traded digital assets. The Greenbook proposal removes any doubt by adding a third election category for actively traded digital assets to the Code. This addition may provide clarity and simplicity for taxpayers reporting crypto trading activity on their tax returns.

Closing Remarks

The Greenbook is merely a set of proposals and should be viewed accordingly. Predictability for Greenbook proposal enactment is low with a deeply divided Congress and upcoming elections this year. The Greenbook proposals signal the Biden Administration’s perspective on where U.S. federal income tax policy should, and could, be headed. Whether these proposals will be ultimately included in any draft legislation or enacted into law is highly unforeseeable.

Seward & Kissel LLP actively monitors tax changes and their impact on the blockchain industry.

¹ The “Code” refers to the Internal Revenue Code of 1986, as amended.