Earlier this year, I wrote about Jarrett v. United States, No. 3:21-cv-00419 (M.D. Tenn.), a case in which a crypto taxpayer rejected a complete government concession of a lawsuit. At issue in the case was whether the taxpayer’s cryptocurrency staking rewards were immediately taxable (article linked here). Presumably, the taxpayer was motivated by a desire to have a court publicly address the issue—which still has not occurred. To this date, there is no clear rule—let alone a clear signal from the IRS about how it views the issue—that dictates whether staking rewards are or are not immediately taxable.
Despite the Jarrett lawsuit not yet providing clarity, another source of potential crypto clarity may be on the horizon. Last week, two senators—one a republican, one a democrat—introduced sweeping legislation that would have major implications if it eventually becomes law (The Senate bill, known as the Lummis-Gillibrand Responsible Financial Innovation Act, is linked here). Of course, this is just a recently-introduced bill and it probably will change in at least some respects if in fact it becomes law. But regardless, there are some interesting items in the bill worth discussing here.
Notably, under the bill, staking rewards would not be taxable until disposition (a sale or exchange) of the staking rewards. This is consistent with the taxpayer’s argument in Jarrett.
In addition, under the bill, mining rewards would also not be taxable until disposition (a sale or exchange) of the mining rewards. (Mining is a highly complex process, but at its core mining is the creation of new blocks on certain blockchains, such as the bitcoin blockchain. When a bitcoin miner mines a new block, they are rewarded with bitcoin (currently 6.25 bitcoin). A new bitcoin block is mined approximately every 10 minutes.) The IRS views mining rewards as includible in gross income immediately upon receipt.
The bill provides that the default tax classification of DAOs (decentralized autonomous organizations) are business entities that are not disregarded entities. The related implications could be far-reaching and warrant serious consideration. If you belong to a DAO, you should speak to a tax advisor sooner rather than later.
The bill also provides some helpful provisions, including but not limited to (1) a de minimis exception, that would exempt $200 of crypto gains or losses per disposition from gross income (so maybe taxpayers will finally be able to buy a burrito with crypto and not have to worry about “the taxman”); and (2) narrowing the definition of who is considered a “Broker” (and thus subject to additional reporting requirements). There are many other provisions in the nearly 70-page proposed legislation, including those elevating the CFTC’s role in regulating cryptocurrencies.
Taxpayers should be aware that the IRS may be about to be overruled by Congress regarding many aspects of crypto taxation. Whether that means that taxpayers may have overpaid tax in prior years is arguably an open question. But, at a minimum, taxpayers should speak with their tax advisors sooner rather than later.
If you would like to discuss this article, or any other civil or criminal tax matter, please feel free to contact me at firstname.lastname@example.org or 214-749-2417.