Despite the ongoing government shutdown, the Senate Finance Committee held a hearing October 1 to examine the federal tax treatment of digital assets, focusing on the need for clear rules regarding cryptocurrency transactions to address lingering issues and compliance challenges.
‘Uncertainty’
Chair Mike Crapo (R-ID) in his opening statement said the Tax Code “does not provide straightforward answers for many digital asset transactions.” Consequently, “taxpayers are left with many unanswered questions, and individuals, businesses and our country’s finances bear that burden.” He added that this uncertainty “makes the U.S. a less attractive place to do business and invest and hurts tax compliance.”
Ranking Member Ron Wyden (D-OR) noted “severe uncertainty and lack of clarity in how tax rules apply to crypto, which increases the tax gap and complicates compliance.” But Wyden also condemned the committee’s Republican members for proceeding with the hearing in the wake of the government officially shutting down as of the same day.
“It’d be a mistake to go without recognizing that an awful lot of people — millions of Americans — are going without pay during this shutdown, and that causes real hardship,” Wyden commented in prepared remarks. “Resolving this shutdown and getting our fiscal house in order really ought to be our focus.”
Wyden nonetheless agreed that the open questions around digital asset taxation “is a subject that deserves consideration.”
Annette Nellen, chair of the American Institute of Certified Public Accountants (AICPA) Digital Asset Tax Task Force and professor at San Jose State University observed that since the IRS’ initial guidance in 2014, “the number and types of digital assets and their uses has grown and continues to do so.”
Lawrence Zlatkin, vice president of tax at Coinbase, stated the digital asset market is “no longer small or experimental … but here in America, our Tax Code still treats digital assets as generic property, as if nothing had changed in over a decade. That gap creates confusion, discourages investment and risks driving jobs and capital offshore.”
The recently enacted GENIUS Act, which exempts certain stablecoin payments from gain or loss reporting, was cited as a step forward despite consensus that more comprehensive reform is needed.
De Minimis Exception
A central topic was whether to create a de minimis exception for small cryptocurrency transactions. Jason Somensatto, director of policy at Coin Center, explained that “every time a user sends crypto, even to buy a coffee or pay a fractional transaction fee, they trigger a complex taxable event.” Similarly, in 1997, Congress “saw a similar issue with foreign currency” and addressed it with a $200 threshold, said Somensatto.
Andrea S. Kramer, founding member of ASKramer Law LLC, argued “the rationale given for granting the foreign currency exemption does not apply to digital assets because people don’t need to pay for a cup of coffee with crypto.” According to Kramer, a de minimis exception would not spare taxpayers from needing to “keep track of all of their transactions in order to demonstrate their compliance.”
But Zlatkin warned that without a de minimis rule, “you’re going to [have] billions of transactions that taxpayers are going to have to report [and] keep track of,” which will “hinder the growth of the industry.”
Senators Elizabeth Warren (D-MA) and Steve Daines (R-MT) questioned witnesses on the risks of abuse and the practicality of compliance relief. Kramer suggested that if Congress pursues a de minimis exception, it should be “crafted in a way that is probably more specific than the current exception that we have for foreign currency,” possibly with limits on transaction size or frequency.
Staking and Mining
The hearing also delved into the treatment of staking and mining rewards. Somensatto urged Congress to clarify that block rewards “are only taxed upon disposition,” since “IRS guidance incorrectly treats these tokens as gross income upon receipt.”
Somensatto emphasized that such rewards “are not received, but are instead created property, just as crops grown by farmers or apps coded by developers. Congress, he continued, should pass legislation to ensure “block rewards are only taxed when sold or exchanged.”
Kramer explained that under current law, “the rewards are taxable upon receipt once they have dominion and control. The awards are compensation for services when a miner or staker adds a block to a blockchain or validates a transaction and subsequently sells those rewards,” she said. “The second transaction is a separate taxable sale.”
Zlatkin illustrated the point that “[t]wo people can do exactly the same thing — one through a U.S.-based service [and] the other through a service overseas. Today, the first may be told that the rewards are subject to withholding taxes, while the second may not. Taxpayers should not get different answers to the same question just because they clicked on a different website,” said Zlatkin.
Senators pressed witnesses on whether staking and mining rewards should be taxed as compensation for services or as self-created property. Kramer supported the current approach favoring tax upon receipt, while Somensatto and Zlatkin advocated for taxation only upon sale.
Nellen in her written statement provided for the hearing offered that if “Congress determines that staking and mining rewards are taxed upon receipt as ordinary income, the source of such income should be determined by the recipient’s residence.” Otherwise, “the source of such income should be determined under general tax principles by reference to the recipient’s residence,” she said.
Take your tax and accounting research to the next level with Checkpoint Edge and CoCounsel. Get instant access to AI-assisted research, expert-approved answers, and cutting-edge tools like Advisory Maps and State Charts. Try it today and transform the way you work! Subscribe now and discover a smarter way to find answers.
