US House Draft Proposes Tax Safe Harbor for Certain Stablecoin Transactions

Recently, two bipartisan members of the US House have unveiled a proposal aimed at creating a limited tax safe harbor specifically for stablecoin transactions. This initiative represents a significant move towards harmonizing cryptocurrency taxation with everyday consumer transactions.

Key Takeaways:

Small stablecoin payments under $200 will be exempt from capital gains tax.
Staking and mining rewards can be taxed after a five-year deferral instead of immediately.
The proposal focuses on consumer use rather than crypto investment or trading activities.

The proposal, known as the Digital Asset PARITY Act, is the work of Rep. Max Miller, a Republican from Ohio, and Rep. Steven Horsford, a Democrat from Nevada. Both lawmakers serve on the influential House Ways and Means Committee, which oversees tax policies, as reported by Bloomberg.

US House Draft Proposes Tax Safe Harbor for Some Stablecoin Transactions

Details of the Tax Exemption for Small Stablecoin Payments

At its core, the proposed bill aims to exempt certain small transactions involving stablecoins from capital gains taxes. Specifically, purchases made using regulated, dollar-pegged stablecoins worth less than $200 would not be subject to taxable events. This change is intended to alleviate the compliance burden associated with everyday payments, where even minor fluctuations in price currently require users to compute potential gains or losses.

Rep. Horsford emphasized that this draft seeks to clarify the rules while maintaining the integrity of the tax system. To qualify for this exemption, stablecoins must be issued by a recognized issuer under the GENIUS Act, be exclusively backed by the US dollar, and maintain a trading price within 1% of $1.00 for at least 95% of the trading days in the previous year. Notably, brokers and dealers would not benefit from the safe harbor, and this exemption would not apply to other cryptocurrencies, like Bitcoin or Ether.

Lawmakers are also considering the possibility of introducing an annual cap to ensure that the provision is used solely for consumer payments, rather than as a shield for investment activities.

Addressing Taxation of Staking and Mining Rewards

In addition to issues concerning stablecoins, this draft seeks to tackle the often-debated topic of when staking and mining rewards should be taxed. Presently, IRS guidelines categorize these rewards as taxable income the moment they are received, which has sparked discontent among industry advocates and some Republican representatives.

On the other side, Senator Cynthia Lummis has been advocating for tax deferral until rewards are sold. The Miller-Horsford proposal introduces a compromise: taxpayers would have the option to defer taxes on staking and mining rewards for five years. After this period, the rewards would be taxed as ordinary income, based on their fair market value. This framework aims to strike a balance between immediate taxation and full deferral until the rewards are sold.

Extending Securities Tax Rules to Digital Assets

The proposed bill also extends various securities tax rules to encompass digital assets. This extension includes applying wash sale restrictions to cryptocurrencies, limiting strategies aimed at locking in gains while deferring taxes, and extending securities lending treatments to eligible crypto loans involving fungible, liquid assets. Notably, NFTs and illiquid tokens would be exempt from these rules.

Additional measures in the draft allow professional traders to utilize mark-to-market accounting and ease appraisal requirements for charitable donations of large-cap digital assets. Lastly, passive protocol-level staking managed by investment funds will be clarified to not qualify as a trade or business.

The stablecoin safe harbor is slated to take effect for taxable years starting after December 31, 2025. Rep. Miller is optimistic that this broader legislation may progress before August 2026.