New Crypto Tax Bill Proposed by Senator Cynthia Lummis: A Comprehensive Overview
On July 3, Senator Cynthia Lummis introduced a groundbreaking bill aimed at streamlining the taxation of crypto assets in the United States. The proposed legislation seeks to amend various sections of the Internal Revenue Code, providing clarity for crypto users on how to calculate, defer, and report their taxable income. By defining terms such as “digital asset” and “actively traded digital asset,” the bill establishes a clear framework for how these assets are treated under tax law. These changes are anticipated to facilitate greater participation in the digital economy while minimizing the risk of inadvertent tax violations.
One of the most significant aspects of Lummis’s bill is the introduction of Section 139J, which proposes to exclude gains or losses from certain transactions involving digital tokens when used to pay for goods or services. Under this provision, transactions with a value below $300 and combined annual gains not exceeding $5,000 would be exempt from taxation. This provision aims to simplify tax reporting for everyday transactions and encourages more Americans to utilize digital currencies. Additionally, the bill mandates that taxpayers maintain separate records for eligible activities, helping to streamline the tax process while also accommodating future inflation adjustments through indexing.
The bill also addresses the market-facing rules that affect the taxing of actively traded tokens. The update expands the securities-lending safe harbor in Section 1058 to include specified assets, meaning that crypto holders can now lend their assets without triggering tax recognition events. Furthermore, a restructured Section 1091 implements wash-sale loss disallowance measures specifically for digital assets while allowing exceptions for stablecoins and dealer inventories. These provisions are designed to help taxpayers avoid complex tax situations arising from the trading of volatile digital assets.
For those involved in crypto trading and investing, the bill grants significant political backing by introducing a mark-to-market treatment under the newly established Section 475(g). This allows dealers and traders of actively traded tokens to adopt annual fair-value accounting for their inventories without needing prior approval from the IRS. This approach not only simplifies record-keeping but also aligns more with modern financial practices, providing a more straightforward method for traders to account for their gains and losses.
Moreover, the legislation redefines how income from mining and staking is reported. Instead of recognizing ordinary income upon the receipt of tokens, miners and stakers would only need to report income when they sell these reward tokens. This change has the potential to significantly alter the tax implications associated with crypto mining, aligning them more closely with traditional income tax standards. Additionally, the bill proposes that private foundations can accept appreciated, actively traded tokens with tax deductions similar to those for publicly traded stocks, broadening the scope for charitable planning.
While the proposed tax reforms are indeed comprehensive, it’s important to note that many of their provisions are set to expire after the 2035 tax year. This is primarily to comply with congressional budget-scoring rules. Senator Lummis has said that the bill is "fully paid for," and she has encouraged stakeholders to submit feedback on the proposal. By cutting through bureaucratic red tape, Lummis believes this legislation will empower more Americans to engage safely and confidently in the digital economy, avoiding the complexities that have historically accompanied crypto transactions.
In summary, Senator Lummis’s proposed tax bill represents a significant step toward clear and manageable guidelines for the taxation of digital assets. By defining relevant terms and outlining specific exceptions, the legislation aims to foster growth within the digital economy while ensuring compliance. With numerous provisions tailored specifically for the unique challenges posed by cryptocurrencies, the bill is poised to make a lasting impact on how digital assets are treated in the United States tax framework. As discussions around this proposal progress, the bill could herald a new era of tax reporting for crypto users, making it easier for individuals and businesses alike to engage with emerging technologies.
