Current Legislative Focus: CLARITY Act and Emerging PARITY Act
While much attention is currently directed toward the potential enactment of the Digital Asset Market Clarity (CLARITY) Act that passed the House last year, there is growing momentum surrounding another significant draft bill: the Digital Asset Protection, Accountability, Regulation, Innovation, Taxation, and Yields (PARITY) Act. This recently introduced draft legislation is attracting interest, as it signals that Congress continues to advance multiple avenues for reforming the tax treatment and regulation of digital assets.
Lawmakers have advanced several discussion drafts on tax legislation that would refine and clarify the tax treatment of digital assets. However, current proposals remain in draft form and may be changed materially. None of the provisions described herein are effective until enacted.
In this alert, “digital assets” broadly refers to blockchain-based tokens such as cryptocurrencies and certain stablecoins (and, in some contexts, related derivatives), though the scope and definitions vary across the draft proposals and cross-referenced Code sections.
The latest legislative proposal, the PARITY Act draft, from Ways and Means Committee members Rep. Max Miller, R-Ohio, and Steven Horsford, D-Nev., was released on December 20, 2025. It builds on the description circulated by Miller in July, as well as draft legislation (the Lummis bill) released by Sen. Cynthia Lummis, R-Wy., and a comprehensive report on digital assets released by the Trump administration.
The PARITY Act draft includes provisions that would:
- Expand wash sale rules to digital assets
- Apply constructive sale rules to digital assets
- Extend securities lending rules to digital assets
- Allow a mark-to-market election for traders and dealers of digital assets
- Create a general de minimis exception for certain transactions
- Create an exception for certain stablecoins
- Offer a new election to defer mining and staking rewards for five years, with ordinary income treatment upon recognition
The effort to reform the tax treatment of digital assets could eventually be combined with broader legislative efforts on digital asset regulation. The CLARITY Act is a sweeping reform effort that passed the House in a 294-134 vote on July 17. The Senate Agricultural Committee and Senate Banking Committee are each planning to mark up Senate versions of the CLARITY Act. The Senate Banking Committee postponed action on its bill after disagreements stymied a January 15 markup. The Senate Agricultural Committee recently postponed a planned markup and is now hoping for committee action by January 27. To reach enactment, lawmakers would likely need to combine the two Senate bills and reconcile them with the CLARITY Act.
The complimentary tax legislation is still in its early stages. Lawmakers have set an aggressive goal to finish the legislation by the end of the first quarter of 2026, but that timeline could slip. The legislative process will be complicated by the overlapping bills in different committees across both chambers. In addition, the PARITY Act proposal should be viewed as an early discussion draft. The draft bill intentionally leaves several key tax issues unresolved and diverges from the Lummis bill in key areas. Complex negotiations will be required to settle on a final bill.
Companies active in digital assets should assess the impact of the proposed changes. Although the legislation is likely to evolve further (and enactment is never guaranteed), the potential for a completed bill this year is very real. To the extent the proposals would significantly change the future tax treatment of transactions, taxpayers should consider the impact on current investment decisions.
Wash Sale Rules
The PARITY Act draft would expand the wash sale rules to apply to digital assets, disallowing any loss on a sale in which substantially identical assets were acquired within 30 days before or after the sale or exchange. Digital assets would be defined under the broker reporting rules in Section 6045, and the rules would also apply to notional principal contracts or derivative instruments with respect to digital assets.
This provision is consistent with the Lummis bill and supported by the administration. It is almost certain to be included as part of any final legislation because it would raise revenue to pay for other more favorable provisions. The current version of the PARITY Act draft would apply to transactions in tax years beginning after the date of enactment, while the Lummis bill would be effective for tax years beginning after 2025. Taxpayers should monitor the legislative process, as it may be possible to undergo transactions to reset basis before the effective date of a legislative change. Taxpayers should note, however, that while there appears to be broad agreement that current wash sale rules do not apply to some types of digital assets, it is less clear whether the rules currently apply to certain derivative transactions.
Constructive Sales
The PARITY Act draft reserves a section for the future insertion of language that would apply the constructive sale rules under Section 1259 to digital assets. No legislative language is offered in the current draft, but it states that the lawmakers have agreed on a “policy direction” intended to treat taxpayers as having made constructive sales of digital assets when entering into “one or more transactions that substantially eliminate both the risk of loss and the opportunity for gain with respect to an appreciated digital asset position.”
Like the wash sale rule, this provision would raise revenue. The Lummis bill does not have a corollary provision, and the lack of legislative language reveals the difficulty in working through technical considerations. The details and definitions would be important if this proposal moves forward.
Mark-to-Market Election
The PARITY Act draft would create an optional mark-to-market election under Section 475 for traders and dealers in digital assets. Like the treatment of securities under Section 475, the mark-to-market election would allow taxpayers to recognize gain or loss on publicly traded digital assets based on their fair market value on the last day of the year, with the gain or loss treated as ordinary. The Lummis bill includes a similar provision but offers more explicit definitions for specified digital assets and traders and dealers. The creation of a mark-to-market election is also supported by the administration’s draft report.
This elective treatment could simplify compliance and reporting for many taxpayers, particularly those that use the mark-to-market election for financial statements. If enacted, a key practical issue will be establishing consistent valuation conventions and reliable pricing sources across exchanges and trading venues for year-end fair market value determinations.
Staking and Mining
The Lummis bill and PARITY Act draft each prescribe very different solutions for the contested treatment of mining and staking. The IRS provided in Notice 2014-21 that mining rewards are generally recognized as income upon receipt. The guidance does not specify the character of the income; in practice, mining rewards are often treated as ordinary income depending on the taxpayer’s facts and circumstances. In Rev. Rul. 2023-14, the IRS similarly held that staking rewards are income when the taxpayer “obtains dominion and control over the staking rewards,” though the IRS again declined to directly address the character of the income.
The PARITY Act draft includes an unfinished provision still “under technical drafting review” that is intended to create an election allowing taxpayers to defer the recognition of mining and staking rewards for five years (or until sold if earlier). Taxpayers making the election would recognize ordinary income on the fair market value of the rewards on the recognition date.
The PARITY Act draft provides a broad definition stating that “mining and staking activity” means "the act of validating transactions on a cryptographically secured distributed ledger, and any activities closely related thereto.” The draft also states that lawmakers have agreed on a policy direction intended to provide that passive, protocol-level staking does not rise to the level of a trade or business; current treatment remains a facts-and-circumstances determination.
The Lummis bill would provide that mining and staking rewards are not recognized as income until sold, with the amount treated as ordinary income. The White House report did not prescribe any specific policy approach but called for the IRS and Treasury to review its current guidance.
Both bills offer more favorable treatment than the current IRS position, with the Lummis bill more generous than the PARITY Act draft. The issue remains contentious among lawmakers, and there does not seem to be much support for the position that staking and mining rewards should be treated as self-created property. Some taxpayers have argued that mining and staking rewards should be analyzed analogously to self-created property, which could support deferring income recognition until disposition and potentially capital gain treatment. However, the proposals released to date generally contemplate ordinary-income recognition frameworks (with differing timing rules), and lawmakers continue to negotiate the appropriate approach.
Charitable Contributions
The PARITY Act draft reserves a section to create an exception from the requirement to obtain a qualified appraisal for charitable gifts of “highly liquid, widely traded” digital assets. The current substantiation rules under Section 170 generally require taxpayers to obtain a qualified appraisal to claim a charitable deduction of more than $5,000 on donated property. No legislative language is offered in the current draft, but a summary of agreed-upon policy goals states that the appraisal waiver is intended to apply only to a “narrow subset of digital assets that are subject to robust market pricing and information reporting.”
To be eligible for the waiver, the summary indicates digital assets would be subject to unspecified minimum market capitalization, trading volumes, and volume-to-market capitalization ratios. For digital assets not eligible for the waiver, the charitable deduction would also be limited to the actual amount received by the charity upon the sale of any donated digital assets.
The Lummis bill offers a broader waiver for “actively traded” digital assets, while the administration’s report recommends repealing the requirement altogether for digital assets.
There is broad support for relief in this area, but lawmakers are still negotiating whether an exception for digital assets should rely on the current rules defining a publicly traded security or whether they should create specific definitions for eligible digital assets. Even if an appraisal waiver is enacted for certain digital assets, taxpayers would still need to satisfy the remaining substantiation, documentation, and reporting requirements applicable to charitable contributions.
De Minimis Threshold
The PARITY Act draft and the Lummis bill both propose de minimis thresholds that would exclude gain or loss on some smaller digital asset transactions. The Lummis bill provides an exclusion of up to $300 per transaction for “personal transactions,” limited to $5,000 in gains per year. Both thresholds would be indexed to inflation, and taxpayers would be required to maintain records distinguishing eligible and ineligible transactions.
The PARITY Act draft reserves a section for the future insertion of language intended to create a per-transaction threshold of $200, consistent with the foreign currency transaction exception under Section 988. Although the draft summary discusses this concept alongside a stablecoin exception, the $200 threshold appears intended as a general de minimis rule for certain personal digital-asset transactions; however, its final scope and any coordination with a stablecoin-specific rule remain under negotiation.
This provision is one of the most contentious, with many lawmakers worrying about the potential for abuse. Months of negotiations between Miller and Horsford have so far failed to produce a final compromise on anti-abuse rules or an aggregate yearly limit. Lawmakers will need to reach a resolution on this issue for any bill to advance.
Stablecoins
The PARITY Act draft would exclude gain or loss from the sale or exchange of stablecoins that have been actively traded and maintained a price within 1% of $1.00 for at least 95% of the trading days in the preceding 12 months.
The exception will not be available unless the taxpayer acquired the stablecoin for a price within 1% of $1.00 and the sale or exchange occurred inside the range of $0.99 and $1.01.
There appears to be less alignment among lawmakers on this issue. The Lummis bill does not include a corollary provision and the administration’s report suggests curbing the use of stablecoins by characterizing them as debt. Key open issues include which markets and pricing sources would be used to test the trading and price stability thresholds, and whether (or how) similar rules would apply to stablecoins pegged to currencies other than the U.S. dollar.
Lending Transactions
The PARITY Act draft would expand the securities lending rules under Section 1058 to include certain digital assets. Section 1058 generally provides nonrecognition treatment for specific types of eligible securities loans. Like many of the provisions in the draft bill, the legislative language is incomplete. A summary of agreed-upon policy goals states that the provision is intended to extend the nonrecognition principles of Section 1058 to the bona fide lending of fungible liquid digital assets if:
- The lender is entitled to the return of identical assets
- The lender has risk of loss and opportunity for gain during the lending period
- The arrangement is not used to effectuate a sale.
The proposal is consistent with the recommendations made by the administration, but the Lummis bill does not address the issue. If enacted, a key technical question will be how the rules would treat protocol-related rewards or other token distributions during the lending period, while ensuring the arrangement cannot be used as a substitute for selling the asset.
Next Steps
The large number of unresolved issues in the PARITY Act draft underscores the complex negotiations still needed before enactment of legislation would be possible.
For instance, the PARITY Act draft does not provide a standalone airdrop tax rule, though it contemplates Treasury guidance on airdrops in limited contexts (such as digital-asset lending). The Lummis bill would defer taxation of certain digital-asset receipts (including airdrops) until disposition, while the PARITY Act draft’s deferral concept is targeted to mining and staking rewards.
Lawmakers will need to reconcile key differences among the major proposals and resolve several outstanding technical issues. But broad bipartisan agreement is emerging on many of the policy goals, and the outlines of a deal are beginning to take shape. Taxpayers active in digital assets should evaluate the potential impact of the changes. Many of the proposals could substantially alter the future tax treatment of current investments and transactions. It will be important to monitor the legislative process with an eye on effective dates. Modeling, structuring, and investment decisions should factor in the potential and timing for changes.
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