House Democrat Floats China Risk Reporting, Crypto Tax Reforms

Representative Brad Sherman (D-CA) on November 9, 2023, rolled out draft legislation that would expand risk disclosures related to public companies’ reliance on China. Sherman also floated bills to tax gains from both crypto investments and securities of companies based in Russia, China, and other “countries of concern” as ordinary income.

Sherman, a former CPA and current ranking member of Financial Services Committee’s Capital Markets subcommittee, rolled out the cluster of bills for the committee’s member day hearing.

The planned legislation reflects Sherman’s long-running criticism of both crypto and China.

Under his China Risk Reporting Act, a public company would be required to disclose annually a description of the degree to which their supply chain relies on or is exposed to markets of mainland China, Hong Kong, Macau and Taiwan, as well as the operations of the company in each of those markets.

A public company would also need to include a narrative description of risk factors associated with a “hypothetical, imminent, or ongoing covered event,” including any consequences for the company’s operations caused by supply chain disruptions or the “devaluation, seizure, denial of access, or nationalization” of the company’s assets in those and certain other foreign markets, among other disclosures. The company would also need to disclose, in certain cases, whether it has a contingency plan in place to minimize the consequences of those covered events.

The bill defines a covered event as a Chinese military action against Taiwan or a “significant disruption” to economic relations between the U.S. and China, including trade embargoes or financial sanctions.

Sherman, for the hearing, also posted drafts of the No Capital Gains Allowance for American Adversaries Act and the Cryptocurrency Taxation Act of 2023.

He framed the former bill as a means to strip preferential tax treatment from investments in adversarial nations. The measure targets stocks or other securities of entities incorporated in so-called countries of concern: China, Russia, Belarus, and Iran. It also applies to property located or used in those countries. Under Sherman’s bill, gains from the sale or exchange of those assets would be treated as ordinary income instead of a capital gain. Those investments would also be ineligible for a step-up in basis at death used to cut the tax burden on inherited assets.

“As you know, we encourage Americans to invest in stock not only by providing a capital gains allowance, but a step-up in basis upon death,” Sherman told the committee. “That’s because we believe we want to encourage investment in American companies in the American economy. So why in the hell are we providing these incentives for investing in the Chinese economy, or that of Russia, Belarus, or Iran?”

The latter bill would require that the gain from the sale or exchange of a digital asset be treated as ordinary income, while loss from the sale or exchange would be treated as a capital loss. The measure would also specify that a taxpayer cannot claim capital losses based on “wash sales” from selling and then quickly buying back digital assets.

“Historically, capital gains allowances were justified on the basis that such allowances stimulated the financing and start-up of American business, which in turn creates jobs and builds the American economy,” Sherman explained in prepared testimony. “However, investments in cryptocurrencies accomplish none of those policy objectives and there is no justification for such investments to be taxed at a rate lower than the income tax rate our staffs pay.”