In the wake of a significant shift in crypto regulation spurred by the new White House administration under President Donald Trump, lawmakers are working on a fresh tax framework aimed at providing clarity and a safe harbor for certain transactions involving stablecoins.
Proposed Crypto Tax Framework
Representatives Max Miller from Ohio and Steven Horsford from Nevada have drafted a preliminary proposal that seeks to align the tax treatment of cryptocurrencies with that of traditional securities.
According to a recent report by Bloomberg, the draft consists of a blend of policy objectives and bill language not yet formally approved.
Related Reading
One of the key features of this draft legislation is its aim to exempt capital gains tax for transactions involving regulated stablecoins. Specifically, the proposal proposes to shield transactions that consistently maintain a value between $0.99 and $1.01 from taxation.
However, this exemption is limited to transactions under $200, and the final text may modify which tokens will qualify for this safe harbor, as advised by aides to both congressmen. The proposal also attempts to establish safe harbors for rewards earned through activities like staking, which involves verifying blockchain transactions.
Representative Miller emphasized that “America’s tax code has failed to keep pace with modern financial technology.” He described the bipartisan bill as a means to inject clarity, fairness, and common sense into the taxation of digital assets.
The proposed draft also addresses the taxation of rewards earned through staking and mining cryptocurrencies, which involves verifying transactions within blockchain networks.
Aligning Digital Assets With Securities Tax Regime
Under guidance from the Internal Revenue Service (IRS) issued during the Biden administration, rewards obtained from staking are taxed at the time of receipt.
Republican lawmakers have voiced concerns regarding this approach, arguing that it taxes assets before owners realize a gain. Conversely, Democrats maintain that these rewards should be classified as compensation and taxed upon receipt.
To navigate this divide, Miller and Horsford aim to find a compromise, allowing taxpayers to defer tax on rewards for up to five years. After this period, the rewards would be taxed as income based on their fair market value.
Pro-crypto Senator Cynthia Lummis, who recently announced that she will not be running for re-election next year, had previously introduced crypto tax legislation that would leave such rewards untaxed until they are sold. This legislation would align more closely with industry preferences.
Related Reading
Additionally, the draft aims to bring digital assets under the same tax regime that governs securities and, in some cases, commodities transactions.
It proposes to include cryptocurrencies in capital gains tax exemptions for foreign investors trading securities through US-based intermediaries like brokers or exchanges.
Furthermore, the plan would permit cryptocurrency traders to utilize mark-to-market accounting, allowing them to recognize unrealized gains and losses based on fair market value at the end of each year.
The proposed legislation also seeks to impose restrictions on deducting losses from wash trades for digital assets and “close existing loopholes” that facilitate transactions designed to lock in cryptocurrency gains while postponing the associated tax liability.
Featured image from DALL-E, chart from TradingView.com
