U.S. Senators Seek Feedback on Taxation of Digital Assets

The chairman and ranking member of the United States Senate Financial Services Committee, Ron Wyden and Mike Crapo, sent an open letter to the digital asset community on July 11 requesting feedback on the taxation of digital assets.

The senators are seeking solutions to extremely complex taxation issues, to the extent that they have provided background reading from the Joint Committee on Taxation to prepare respondents.

The Internal Revenue Code of 1986 provides “no straightforward classification for digital assets,” according to the senators. Stating:

“In recent months, the Committee on Finance initiated a bipartisan effort to identify key questions that lie at the intersection of digital assets and tax law.”

They posed a large number of questions organized into nine categories, elaborating the letter addressed fair value (mark-to-market) accounting, the trading safe harbor to encourage foreign investment, digital asset loans, wash sales, constructive sales (which are closely related to short-selling), income from staking and mining, “nonfunctional currency,” reporting by foreign firms, and valuation and substantiation on an exchange.

The queries frequently cite particular sections of the tax code. To date, the Internal Revenue Service’s (IRS) crypto-related efforts have focused primarily on combating illicit activities.

It proclaimed earlier this year that its law enforcement efforts had seized a total of $10 billion in cryptocurrency.

Additionally, the IRS is becoming more proactive regarding income taxation. In a recent case, for instance, it asserted that in 2021 it issued a subpoena to the cryptocurrency exchange Kraken requesting user information on all transactions over $20,000 involving users.

The Northern District of California District Court ordered Kraken to provide this information on June 30. The committee will receive responses to the letter until September 8.