Crypto Allies Look to Build on Stablecoin Momentum for Tax Rules

Tax writers and their industry allies are hoping to capitalize on recent moves toward regulating cryptocurrencies to draft a new taxation regime for digital assets.

The Senate Finance Committee is scheduled to meet Wednesday to examine the current taxation of crypto after Congress in bipartisan fashion crafted rules of the road for stablecoins.

Crypto-focused tax proposals were left out of the $3.4 trillion GOP tax law, but there’s been interest from the Trump administration and bipartisan Congressional action on non-tax digital asset legislation this year.

It’s prompted industry leaders and lobbyists to push lawmakers to find agreement on crypto-related tax provisions so they’re ready if a bill materializes.

President Donald Trump earlier this year signed bipartisan law (Public Law 119-27) allowing qualified financial institutions and nonbank entities to issue stablecoins, an early priority for the cryptoasset industry seeking rules.

Now some see a tax bill as a way to build on that legislative momentum, even in an increasingly partisan Congress, and avoid losing the nascent industry to more favorable regimes overseas.

Double Taxation Warning

If the Senate hearing happens as scheduled amid congressional dalliance with a funding lapse, it would come on the heels of a July House Ways and Means Committee hearing where industry officials said that incomplete tax guidance has led to difficulties complying with reporting requirements, making it harder for large financial institutions to branch out from traditional finance into digital assets.

Sen. Todd Young (R-Ind.) expects to ask the panel about the current tax treatment of the block reward or staking reward process, said spokesperson Leah Selk.

Industry has warned that the standing regulation on that process for generating new crypto tokens constitutes double taxation, contrary to how other goods are produced. Witnesses representing the industry compare staking rewards to a farmer’s yield or an artist’s work.

“It is created property,” said Jason Somensatto, director of policy at Coin Center. “The guidance has always been a kind of misunderstanding of the technology and just wrong on the law.”

A bill introduced by Sen. Cynthia Lummis (R-Wyo.) proposes (S. 2207) deferring taxes incurred through mining and staking, similar to existing rules for newly created property. Lummis doesn’t sit on Finance, but panel members Sens. Marsha Blackburn (R-Tenn.) and Bill Cassidy (R-La.) co-sponsored the bill earlier this month.

“It is important that we pass a crypto tax law to make certain hostile regulators can never again weaponize government against an asset class they don’t like,” Blackburn said in a statement.

Past bipartisan proposals such as eliminating taxes on staking rewards would be “a very good place to start,” said Sen. Kirsten Gillibrand (D-N.Y.), who co-authored such legislation with Lummis.

The bill also proposes exempting lending from taxation and allowing traders to elect mark-to-market treatment, both key asks from the digital assets industry seeking parity with other financial instruments.

A working group tasked by the Trump administration called on Congress to pass legislation that “treats digital assets as a new class of assets subject to modified versions of tax rules applicable to securities or commodities” for federal tax purposes, the group said in a fact sheet.

Lummis’ bill includes a threshold that would allow an exemption for taxpayers incurring less than $5,000 in annual asset gains or losses to report that as income.

Crypto industry executives would welcome that: Mainstreaming stablecoins without such protections could create a harsh administrative burden for taxpayers and the IRS if every transaction would be taxed.

House Ways and Means Committee member Rep. Max Miller (R-Ohio) recently announced plans to release his own crypto tax bill. His plan also would touch on tax treatment in scenarios when blockchains split, or when cryptocurrency is sent, unsolicited, to digital wallets.

New Forms, New Headaches

Reporting requirements included in the 2021 infrastructure law are set to take effect at the end of the year and could generate billions of new forms, which would be a surprise to taxpayers and overwhelm a beleaguered IRS.

Softening those requirements for some taxpayers would cut down on paperwork for brokers and confusion for those just dabbling in the assets.

“If you want stablecoins to reach their full potential, this is a good way to do that,” said Lawrence Zlatkin, Coinbase vice president for tax who will speak to the Finance Committee Wednesday.

House and Senate Democrats have indicated an openness to work with GOP lawmakers on crypto-related tax issues and there’s been bipartisan interest in areas like setting a minimum dollar threshold that triggers some reporting requirements.

But President Donald Trump’s family dealings in digital assets have led to concerns he may give the politically influential industry preferential treatment.

Democrats may also pump the breaks on legislation during Republican control of Congress, especially if it ends up helping lawmakers’ donors in the financial sector. Democrats on the committee have raised concerns about criminals leveraging the crypto industry.

“It’s an industry that is fairly new,” said Andie Kramer, a digital assets attorney invited by Senate Finance ranking member Sen. Ron Wyden (D-Ore.) to testify. “If we jump too quickly, then we could find ourselves in a position where we can’t bail ourselves out.”

The Lummis bill also applies the IRS’s wash sale rule to cryptocurrencies, disallowing investors from claiming a loss on sold digital assets if they buy back a similar asset in a short timeframe. That could bring in revenue lost to the other proposals in Lummis’s bill, which is backed by digital asset holders.

“That really seems to be the pay-for on some of what I would view” as industry-favorable proposals, said Tom Shea, who leads EY’s digital asset tax initiatives.