Crypto tax proposals in the 2024 Greenbook
On March 9, 2023, the Biden Administration released General Explanations of the Administration’s Fiscal Year 2023 Revenue Proposals (colloquially called the Greenbook), which includes prior year proposals and two new crypto tax proposals. In an effort to “modernize” the rules, the Administration first seeks to extend the wash sale rules to crypto and second, to impose an excise tax on crypto mining. These new proposals are in addition to the restated 2023 crypto tax proposals of applying loan security nonrecognition rules to cryptocurrency loans, allowing dealers/traders of cryptocurrency to make mark-to-market elections on certain digital assets, requiring crypto brokers to report information on foreign investors, and expanding the mandatory disclosure requirement for holders of certain foreign financial assets to include digital assets. These are discussed in more detail in our May 2022 issue here.
New 2024 Greenbook proposals
Wash sale rules
Section 1091 disallows a loss from a sale of stock or securities if the same or substantially identical stock or securities are purchased within 30 days before or after the sale (“wash sale”) unless the taxpayer is a dealer in stock or securities and the loss is sustained in the ordinary business course. The proposal in the 2024 Greenbook provides that retail investors and digital asset traders would be similarly unable to claim a loss on digital assets that were purchased and subsequently sold within the 30-day window. Rather, where this is the case, the group of transactions would be consolidated into a single transaction and a loss would be recognized upon the sale of crypto acquired outside of the 30-day window.
The proposal also states that the wash sale rules should also be updated to reflect new types of financial instruments and provide rules for related party sales. In particular, the proposal suggests that rules should address derivative financial instruments, including modifications to the basis rules to prevent abuse. Further, the proposal clarifies that if a broker were required to report a customer’s basis on a disposition of a digital asset (or another asset), the basis would be reported without regard to the wash sale rules except where the sale of the loss asset and the transaction triggering the wash sale rules occur in the same account with identical assets.
Excise tax on mining
To address the environmental consequences of digital asset mining, the proposal seeks to encourage cryptocurrencies and digital assets to use a validation method that uses significantly less energy, such as proof-of-stake. The suggestion of using less energy intensive means of mining comes on the heels of proposing a 30 percent excise tax on the cost of electricity a firm uses in its mining efforts. As the proposed excise tax is levied on electricity, it would apply regardless of whether any rewards are provided for the mining activity. The tax would start at 10 percent in 2024 and increase to 20 percent in 2025, and 30 percent in 2026.
Given the split government, the lack of consensus on how to address tax for digital assets, and the turbulent environment for cryptocurrency investors and stakeholders, it is unclear how successful these proposals will be. However, this may give lawmakers a chance to provide some clarity on crypto tax rules generally and provide the basis for a continued discussion on the rules and policy related to cryptocurrency and digital assets.