Proposed Legislation on Digital Asset Regulation Has Several Tax Provisions, Including a Wash Sale Proposal

Senators Gillibrand (D-NY) and Lummis (R-WY) reintroduced a bill on July 12 that would, if enacted, have broad implications for the regulation and taxation of digital assets such as cryptocurrencies. The bill, titled the “Responsible Financial Innovation Act,” contains several tax provisions, including a wash sale proposal, intended to generate revenue to pay for the regulatory objectives of the legislation. 

The bill would give significant regulatory authority over many digital assets to the Commodity Futures Trading Commission, as opposed to the Securities and Exchange Commission (SEC).  (Note the question of the SEC’s authority to regulate a crypto token as a security was addressed in a recent court ruling involving Ripple Labs). 

Among the tax provisions, the bill would expand the scope of the wash sale rules under IRC Section 1091 to include losses on “specified assets.” Such assets would include actively traded digital assets and a broad array of derivatives, such as total return swaps, on those assets. The existing wash sale rules only apply to stocks and securities. 

Other noteworthy tax provisions of the bill include:

  • Certain intermediaries, such as dealers, would be able to mark-to-market digital assets for tax purposes.
  • Loans of digital assets would be treated as non-taxable events, consistent with the treatment of securities lending arrangements.
  • The IRC Section 864(b) securities and commodities trading safe harbor for non-U.S. investors would be expanded to include digital asset trading under certain circumstances.  

The bill, while bipartisan, faces significant hurdles before it could be enacted this year.  However, the bill comes on the heels of the Senate Finance Committee’s request for feedback from the industry on how digital assets should be taxed, so clearly there is significant interest and momentum for legislation in this area.  

BDO will continue to monitor and report on developments in the taxation of digital assets.