Congress has delivered on stablecoins with the GENIUS Act, and is advancing serious legislation on crypto market structure. These are big wins for U.S. competitiveness. But unless Congress and the IRS act on crypto tax, upside from this legislative progress will be capped.
Because of uncertainty in U.S. tax law, a large share of crypto activity (staking, trading, lending, even infrastructure build-out) has already moved overseas. Foreign jurisdictions have been quick to provide clarity missing in the U.S. If we want to onshore liquidity, investment, and jobs, Congress must swiftly update and clarify the rules, and the IRS must do its part.
The Senate Finance Committee under Chairman Mike Crapo (R-ID) held a hearing yesterday, Oct. 1, to examine digital asset taxation. This builds on Crapo and then-Chairman Ron Wyden’s bipartisan 2023 RFI on crypto tax, and Senator Lummis’ crypto tax discussion draft from July. In the House, House Ways & Means Committee Chairman Jason Smith has already held one hearing on crypto tax in July, and Rep. Max Miller is working on a draft proposal.
The momentum is there – this is the window to get crypto tax done.
Here are the most urgent priorities, divided between what requires Congressional action and what can be clarified through IRS guidance. Many of these priorities were included in the President’s Digital Asset Working Group’s 180 Day Report (Paradigm analysis).
Where Congressional Action Is Needed
- Tax staking and mining rewards solely upon disposition
Today, under flawed 2023 IRS guidance, the IRS suggests staking and mining rewards should be taxed when they’re “received,” regardless of whether the tokens can be sold or not (e.g. when staking ETH or SOL, a user must un-bond any rewards, which can take days or even weeks, before those new assets are saleable) – and then again upon disposition. This creates phantom income and discourages U.S. participation in core network activity. Rewards should be credited to a taxpayer at zero basis and then taxed as gains only when sold, consistent with economic substance. A useful parallel: Extracting oil from a well is not a taxable event; selling it and recognizing revenue is. (See: Proof of Stake Alliance’s work on this subject.) Rep. was Drew Ferguson (R-GA) and Rep. Wiley Nickel (D-NC) introduced legislation in the last Congress that would have addressed this issue. Further Congressional action on this front would be made easier with a rescission of the IRS’s 2023 erroneous guidance. - Establish a trading safe harbor for digital assets
Foreign investors trading stocks, securities and commodities on U.S. exchanges are shielded from U.S. taxation under the trading safe harbor ((IRC) Section 864(b)(2)). Digital assets should be no different. Without clarity, foreign investors route trades elsewhere and choose validator infrastructure offshore. A crypto trading safe harbor would bring liquidity back to U.S. markets and strengthen domestic exchanges. - Source staking income to the taxpayer’s residence
Right now, without clear rules to the contrary, many tax advisors assess staking income as sourced to wherever the staking infrastructure is located (similar to cloud service infrastructure), which could result in 30% withholding tax on foreign investors who stake through U.S. service providers. That uncertainty penalizes U.S.-based infrastructure and pushes validation abroad. Congress should source staking income to the residence of the taxpayer, just as it does for derivatives and foreign currency. This simple fix would onshore staking activity. - Expand IRC §1058 to cover digital asset loans
Market liquidity – in crypto and traditional markets – depends on lending and credit availability. Current rules give securities loans nonrecognition treatment but leave digital asset loans in limbo. Extending §1058 would ensure that lending tokens, whether via traditional contracts or smart contracts, doesn’t create a taxable event, strengthening market liquidity. - Enumerate staking rewards in UBTI exemptions
Nonprofits, endowments, and pension funds should be able to stake without fear of triggering unrelated business taxable income. Congress should make this explicit, opening the door for greater institutional participation. - Treat stablecoins as cash equivalents
Stablecoins function as digital cash. But under current tax law, taxpayers who use stablecoins are taxed on fractional pennies of gain and loss each time, and custodians often have to send them information returns for every transaction. Treating stablecoins like cash for tax purposes would greater-enable their use in everyday business activities like payroll and consumer purchases; in addition, it would treat stablecoin-denominated loans as debt for tax purposes, which would align the tax accounting of those loans with their economic substance. - Eliminate Section 6050I from the Infrastructure Investment and Jobs Act
The 2021 Infrastructure law extended antiquated “cash-reporting” rules to crypto, requiring businesses to report the receipt of over $10,000 in crypto to the IRS, including their counterparty’s tax ID number. In practice, this is unworkable, as wallet addresses are not “identifiable persons,” and raises serious constitutional concerns. Repealing §6050I would remove a chilling provision that discourages peer-to-peer transactions on threat of felony prosecution. Coin Center has been a consistent voice regarding the flaws in this statute. - Exercise caution applying wash-sale rules to digital assets
Extending wash-sale rules to digital assets could potentially be one of the main “pay-fors” in any tax package. However, there is a good reason the wash sale rules currently do not apply to other commodities, like foreign currency: when someone regularly (e.g., monthly) acquires commodities and then uses them in everyday, non-tax-motivated transactions, denying them capital losses on those transactions is punitive and unadministrable. If Congress moves forward with a wash sale provision for crypto, it should exempt non-tax-motivated transactions. One possible way to do so would be to give crypto “investors” an ability to elect out of the wash sale rules and into a “mark-to-market” taxation regime instead.
Where IRS Guidance Is Sufficient
- Confirm that bridging, wrapping/unwrapping, and cross-chain burn/mint (e.g. Circle CCTP) are nonrecognition events
These technical operations don’t create economic gain or change ownership. IRS guidance should make clear they are not taxable events. - Clarify treatment of airdrops, forks, and rebase events
When networks fork or protocols issue new tokens, it is unclear whether income arises immediately or only when tokens are sold. The IRS should issue bright-line guidance to prevent phantom income and align taxation with economic reality. - Clarify rules for collateral, liquidations, and forced sales
Using tokens as collateral or experiencing an automated liquidation in DeFi can raise uncertainty. IRS guidance should confirm that pledging collateral is not a taxable event and provide clear rules for liquidations. - Update charitable giving rules for digital assets
Crypto donations should be treated like donations of publicly traded securities: “readily valued property” exempt from costly appraisal requirements. This would streamline crypto philanthropy and align treatment with traditional assets. - Exempt unrealized crypto gains from corporate alternative minimum tax
Section 55 of the tax code imposes a corporate alternative minimum tax (CAMT) on large corporations’ “book income,” which includes unrealized gains. Taxing unrealized gains and losses from crypto holdings may whipsaw corporate book income, creating mismatches with cashflow and tax liability. Treasury should exempt the application of section 55 to crypto.
Conclusion
Congress has shown it can legislate responsibly on stablecoins and market structure. But without action on tax, the opportunity from those victories is constrained. The U.S. cannot fully unlock the benefits of digital assets until it provides a tax framework that matches economic reality.
Much of this activity is already offshore. The question is whether we can bring it back. Congress and the IRS should act now—before it’s too late. Let’s bring crypto home.
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Acknowledgements: Jason Schwartz; Abe Sutherland; Mario Sabatés