Crypto Industry Asks for Guidance as Tax Cliff Talks Rev Up

The cryptocurrency industry is ramping up lobbying Congress members, seeking a host of policy asks as lawmakers prepare for a major tax policy debate.

Next year will be pivotal for tax policy, because much of the 2017 GOP tax law will expire at the end of 2025. So without action, millions will see their taxes rise—pushing Congress to act. The crypto industry sees it as an opportunity to push through some long-awaited clarifications since lawmakers say it may be the best opportunity in the next few years for any tax changes.

“We don’t have a choice. This isn’t something you get to do at leisure,” said Rep. David Schweikert (R-Ariz.), a member of the House Ways and Means Committee and the leader of the panel’s “New Economy” tax team.

His group is gathering information on what’s needed in the crypto tax space, Schweikert told Bloomberg Tax recently. “This is Congress. Congress will almost only do actual work when it’s under stress.”

Policies Needed

Among the priorities for crypto companies is clarity on the de minimis rule, or a threshold for smaller transactions that don’t have to be reported. The IRS final broker reporting rules, which came out in June, included a de minimis reporting rule for stablecoins and non-fungible tokens, but not for other cryptocurrencies.

Another important clarification is whether crypto lending is subject to immediate taxation, similar to securities lending. The lack of guidance in this area puts “a chilling effect on much-needed market liquidity in the cryptocurrency market,” according to Coinbase’s tax whitepaper describing 10 policy changes that could benefit the industry.

The biggest concern from blockchain trade association The Digital Chamber is the taxation of block and staking rewards, said Chief Policy Officer Cody Carbone. These rewards, which affect bitcoin miners or those who hold cryptocurrency to help validate transactions on the blockchain and create new tokens, are now taxed as income when they’re received and also taxed at the point of sale.

“They should only be taxed when they actually dispose or use the asset,” Carbone said. “That is something we’re pushing very, very hard.”

Lawmakers already have introduced legislation that would address some digital asset tax issues. Sens. Ted Budd (R-N.C.), Kyrsten Sinema (I-Ariz.), Cynthia Lummis (R-Wyo.), and Kirsten Gillibrand (D-N.Y.) introduced a bill in July that would create a de minimis exemption from capital gains tax for low-value cryptocurrency transactions in day-to-day use. Reps. Drew Ferguson (R-Ga.) and Wiley Nickel (D-N.C.) introduced legislation that would clarify that staking rewards should be taxed at the point of sale.

Senate Finance Committee Chair Ron Wyden (D-Ore.) and the panel’s ranking member Mike Crapo (R-Idaho) last year issued a request for information from the digital asset industry on various topics, which spurred hope among crypto businesses that lawmakers are taking a thoughtful approach.

Possible Revenue Raiser

While the industry calls for clarifications, lawmakers are mulling other policy measures in the crypto tax space to offset some cost of a tax package in 2025.

Extending all the expiring provisions of the 2017 tax law would cost nearly $4.6 trillion, according to the latest estimates from the Congressional Budget Office. No matter who wins out in the November elections, there’s pressure for lawmakers to pay for at least some of the extensions.

Closing the “wash sale” loophole, which allows crypto investors to claim losses by quickly selling and repurchasing their digital assets, is a likely option for lawmakers, said John Schoenecker, head of policy at TaxBit and a former GOP tax staffer. IRS rules prohibit such wash selling for securities.

Subjecting cryptocurrencies to the IRS wash sale rule has been proposed before—in a previous version of the Democrats’ Build Back Better legislation and as a pay-for for the Recovering America’s Wildlife Act, both of which failed to pass in 2022. Lummis and Gillibrand also have tried to use the measure to pay for their broader crypto regulatory legislation.

The Joint Committee on Taxation estimated in 2021 that applying the wash sale rule to crypto would raise nearly $17 billion over 10 years, though some lawmakers have said they’re skeptical that crypto would raise as much revenue now.

“Things that raise the federal government money, like applying the wash sale prohibition to digital assets, is very easy to get into a bill in 2025,” Schoenecker said. “That is one that gets talked about on Capitol Hill like it’s almost a given.”

Crypto industry executives are open to having the wash sale rule apply to digital assets. But they want to see that revenue raiser paired with legislation that addresses their needed clarifications, said Coinbase Vice President of Tax Lawrence Zlatkin.

Dealing With Uncertainty

Ambiguity in the taxation of cryptocurrency makes it difficult to guide clients, said JoAnn Holmes, a legal adviser for blockchain businesses. Digital assets don’t fit neatly in rules surrounding more traditional financial tools. She encourages clients to remain flexible and prepare for changing laws.

And the crypto industry is still grappling with how to comply with the IRS rules implementing the broker reporting requirements, which Congress enacted in 2021, Holmes said. Rep. Gary Palmer (R-Ala.) introduced a Congressional Review Act resolution to undo those regulations, though it’s unclear when the House will take up that measure.

“Over the years, crypto has morphed and evolved into a larger sector, and we virtually still have no clarity on a number of things,” Zlatkin said.