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Censors Cynthia Lumis (R-WY) and Kirsten Gillibrand (D-NY) unveiled today cryptocurrency law Which seeks to provide regulatory clarity on a range of issues, including taxes. But it also comes as a surprise to those who are not following the drafting process.
Simply put, their bill will create a huge tax avoidance opportunity for those involved in the crypto business. As written, new cryptocurrency tokens earned by participants in “mining” or “staking” will not count as taxable income until the tokens are sold.
Crypto proponents argue that this is in line with the tax treatment of other industries. But a closer look reveals that Lumis-Gillibrand’s proposal would deviate from one of the tenets of good tax policy: neutral treatment of taxpayers in different parts of the economy. Tax avoidance on investment income is one thing. But the bill would essentially allow mining and betting companies to indefinitely avoid tax on income from their core business activities, contrary to existing tax law and legal precedent.
Is there any legal justification?
First, a refresher on how this stuff works. Most cryptocurrencies, including bitcoin, involve “miners” who use lots of computers and electricity to solve complex math problems. Some new currencies use an alternative “proof of stake” model where token holders can “stake” their currency on the network and participate in validating the network’s transactions. This model requires very little computing power and power. Either way, miners and stakeholders are rewarded with new cryptocurrency tokens for their efforts.
Fair enough. But why should someone who is paid for their work in fiat currency pay tax on their income, while someone who works in exchange for digital assets can avoid the tax until they sell that asset? Many people have looked at that question and come to the same conclusion: they shouldn’t.
in April, New York State Bar Association Made a series of crypto tax policy suggestions to the US Treasury. This shed light on a court case in Tennessee where a couple challenged the IRS’s ability to tax bounty at stake, The Bar Group urged the Treasury to confirm that the awards are considered taxable income, based on the precedent of the US Supreme Court and the facts of attrition of business activity.
Crypto advocates have argued that mining and staking are similar to reward manufacturing or mineral extraction. For real-life minerals, a widget or miner is taxed only if it sells the widget or mineral. But the Bar report states that unlike widgets or minerals, new digital tokens are not created solely by crypto miners or stackers. It also includes network protocols developed by other coders.
Equally weak is the case for deferring taxes on mined rewards. In fact, when the IRS determined in 2014 that cryptocurrencies are subject to capital gains taxes, it noted that Tokens earned by crypto miners are taxable as gross income upon receipt, The question of the existing law in the matter of mining has been settled. If you want to dig deeper, University of California-Irvine professor Omri Marion has a new piece tax notes (paywall) which completely separates the arguments behind mining and the tax preference proposal.
Is this tax break necessary?
Of course, Congress can always change the law. But does the crypto industry need special tax priorities now?
It is difficult to make such a case. Despite the recent price volatility, the past few years have seen a huge increase in the value of many cryptocurrencies. Venture capitalists remain excited. And if you haven’t seen an A-list celebrity or prominent professional athlete promoting crypto investing, you clearly haven’t watched television in the past 12 months.
Simply put, the market has sent no signal to policymakers that tax policy uncertainty or a lack of tax preferences is inhibiting innovation.
It is also a strange time to seek enactment of such a huge tax preference. Treasure will soon start answering Many open crypto questions as determined by Last year’s infrastructure law, This should give clear guidelines for issuing 1099 tax forms to crypto exchanges and their customers and allow the IRS to better monitor taxable gains or losses. And lots of new crypto taxes compliance tools are available to help investors track their tax liability.
Crypto companies will argue that a special income deferral rule is necessary to ease their administrative burden. As Marion explains in his tax notes Peace, day traders and algorithmic trading operations already handle these issues. And even with deferrals, miners and stakeholders will still need to monitor the cost basis of new reward tokens and their changes in value, both to track the financial health of the business and those assets. In anticipation of converting any of them into cash.
The Mining and Staking tax deferral provisions of the Lummis and Gillibrand bills will provide crypto businesses with an opportunity to avoid a tax they do not need and that does not exist in other parts of the economy.
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