New Crypto Tax Proposal: Bipartisan House Duo Advocates for Stablecoin Safe Harbor

In light of recent changes in cryptocurrency regulations driven by the new administration under President Donald Trump, lawmakers are pushing for a new tax framework. This initiative aims to clarify rules and create a safe harbor for certain transactions involving stablecoins.

Key Takeaways

Bipartisan representatives aim to create a new tax framework for cryptocurrencies, particularly focusing on stablecoins.
The proposal seeks to exempt capital gains tax on transactions of regulated stablecoins that maintain a value between $0.99 and $1.01 for amounts under $200.
Taxation rules for staking rewards would allow for a five-year deferral before taxation based on the fair market value.
The initiative aims to categorize digital assets similarly to securities, providing a more streamlined taxation process.
With this proposal, tax deductions for losses from wash trades would be restricted, and existing loopholes would be addressed.

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Overview of the Proposed Crypto Tax Framework

Representatives Max Miller from Ohio and Steven Horsford from Nevada have put together an initial proposal designed to align the tax treatment of cryptocurrencies with that of traditional securities. According to a recent Bloomberg report, the draft combines various policy goals and legislative language that has yet to receive formal approval.

A primary aspect of this proposal is its intention to exempt capital gains tax on transactions that involve regulated stablecoins. Specifically, it seeks to protect transactions that maintain a consistent value between $0.99 and $1.01 from taxation. This exemption, however, is applicable only to transactions under $200. Additionally, the final version might change which tokens qualify for this safe harbor, based on insights from both congressmen's aides. The proposal also aims to establish safe harbors for rewards generated through activities like staking, which is the process of verifying blockchain transactions.

Representative Miller noted, “America’s tax code has failed to keep pace with modern financial technology.” He describes the bipartisan bill as a way to bring clarity, fairness, and common sense to the taxation of digital assets.

The draft also addresses the taxation of rewards acquired through staking and mining cryptocurrencies, which are processes involved in verifying transactions on blockchain networks.

Bringing Digital Assets in Line with the Securities Tax Regime

The Internal Revenue Service (IRS) provided guidance during the Biden administration, indicating that rewards from staking are taxed upon receipt. Republican lawmakers have expressed concerns about this approach, asserting that it imposes taxes on assets before gains are realized. In contrast, Democrats argue that these rewards should be classified as compensation, thus being taxed when received.

To bridge this gap, Miller and Horsford are working to create a compromise, allowing taxpayers to defer taxes 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 her decision not to run for re-election next year, previously introduced crypto tax legislation. This legislation would allow such rewards to remain untaxed until they are sold, aligning more closely with industry preferences.

Furthermore, the draft proposes to place digital assets under the same tax regime that currently governs securities, and in some situations, commodities transactions. It includes cryptocurrencies in capital gains tax exemptions for foreign investors trading securities through U.S.-based intermediaries like brokers or exchanges.

Additionally, the plan would enable cryptocurrency traders to use mark-to-market accounting, which allows them to recognize unrealized gains and losses based on fair market value at year-end. The proposed legislation also seeks to limit the deductions of losses from wash trades related to digital assets, and it aims to "close existing loopholes" that enable transactions designed to lock in cryptocurrency gains while deferring tax liabilities.

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The daily chart shows the total crypto market cap valuation soaring back above $3 trillion. Source: TOTAL on TradingView.com