Biden Administration Proposes Changes To Taxation Of Cryptocurrency Transactions – Income Tax

On March 28, 2022, the Biden administration proposed some very limited changes to the taxation of cryptocurrency transactions. The proposals do not change the current treatment of cryptocurrency as property for federal income tax purposes and do not address any of the fundamental tax issues raised by cryptocurrency.

I. Applying Securities Lending Rules to Digital Assets

Under current law, securities loans that meet certain requirements are exempt from tax under Section 1058.¹ The Biden administration’s proposal would extend Section 1058 to apply to “actively traded digital assets” recorded on cryptographically-secured distributed ledgers, as long as the loan agreement contains terms similar to those currently required for loans of titles.² The Secretary would also have the power to define “actively traded” and extend Section 1058 to “not actively traded” digital assets. In addition, the proposal would require a lender to include in gross income amounts that would have been included had it not loaned the digital asset (i.e., “alternative payments”). The proposals would apply to taxation years beginning after December 31, 2022.

II. Apply mark-to-market rules to digital asset brokers and traders

Sections 475(e) and 475(f) permit commodity traders and securities dealers to mark-to-market their commodities and securities and treat gains and losses as ordinary gains or losses . The Biden administration would extend the market value election to actively traded digital assets, derivatives on actively traded digital assets, and hedges of those digital assets. The proposal clarifies that digital assets would be treated as a third class of assets, separate from securities and commodities, to be governed by rules similar to those applicable to actively traded commodities. The proposals would apply to taxation years beginning after December 31, 2022.

III. Require information reports for digital asset transactions

1. Financial institutions and digital asset brokers

The Foreign Account Tax Compliance Act (“FATCA”) requires foreign financial institutions to report information about accounts held directly or indirectly by US taxpayers to the IRS. FATCA also requires brokers to report customer information to the IRS, including identity, gross proceeds from the sale of securities and certain commodities, as well as cost basis information for certain customer titles.

The Biden administration would extend FATCA reporting requirements to accounts held by foreign persons and held in a U.S. office, as well as certain non-U.S. source payments. In addition, financial institutions, including US digital asset exchanges, would be required to report information about certain passive entities and their foreign owners, and digital asset brokers would be required to report gross proceeds and other information. about their customers.³ The proposals would apply to taxation years beginning after December 31, 2022.

2. Taxpayers with Foreign Digital Asset Accounts

Section 6038D requires taxpayers with an interest in certain foreign assets with an aggregate fair market value of more than $50,000 in a tax year to report the name and address of the financial institution where a account is maintained, the account number and identifying information about assets not held in a financial account.

The Biden administration is proposing to amend Section 6038D(b) to require reporting of any account that holds digital assets managed by a foreign digital asset exchange or other foreign digital asset service provider. The proposals would apply to taxation years beginning after December 31, 2022.

Footnotes

1. All references to Articles are to the Tax Code 1986, as amended. Taxpayers who loan securities under agreements that do not satisfy section 1058 may be taxable initially and when they recover the loaned securities.

2. The securities lending agreement must (i) provide for the return to the transferor of securities identical to the securities transferred; (ii) demand payment to the grantor of sums equal to all interest, dividends and distributions on the security during the term of the loan; (iii) not reduce the transferor’s risk of loss or opportunity for gain in the securities transferred; and (iv) meet such other requirements as the IRS may prescribe by regulation. §1058(b).

3. A broker would be defined as “any person who (for compensation) is engaged to regularly provide any service that performs transfers of digital assets on behalf of another person”.

Biden administration proposes changes to taxation of cryptocurrency transactions

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