The President’s Working Group on Digital Asset Markets recently issued a detailed report, titled “Strengthening American Leadership in Digital Financial Technology,” recommending regulatory and legislative proposals to advance the policies established in Executive Order 14178 (Jan. 23, 2025). The report identifies gaps in and recommends changes to current laws and regulations with respect to digital assets.
Chapter VII of the report reviews existing guidance relating to the taxation of digital assets and associated information reporting and identifies priority items for the publication of guidance, along with priority legislative recommendations directed toward Congress, the Department of the Treasury (Treasury), and the Internal Revenue Service (IRS).
The report concludes that current IRS guidance on the taxation of digital assets is limited. While the IRS has concluded that virtual currency is treated as property for US federal income tax purposes in Notice 2014-21, and additional guidance has addressed hard forks, staking and non-fungible tokens (NFTs), there are many areas of uncertainty with respect to transactions involving digital assets.
The report identifies instances where the current law applicable to the taxation of digital assets is unclear. In certain instances, the report recommends enacting specific changes to laws or regulations, but in other instances, the report merely identifies areas that need guidance and defers to either Congress, Treasury, or the IRS as to how to resolve the uncertainty. The report covers various areas of tax law, including (i) the taxation of securities and commodities, (ii) the taxation of stablecoins, and (iii) tax information reporting.
I. Characterization of Digital Assets for Tax Purposes
As noted above, IRS Notices characterize virtual currency as property, not currency. IRS guidance does not address whether such property is a “security” or “commodity” for tax purposes (the criteria for which differ from the securities law meaning of the term “security”). The characterization of property as a security or commodity for tax purposes affects the application of a number of provisions of the Internal Revenue Code (the Code).
Rather than amending existing US federal income tax laws to include digital assets in the definition of “security” or “commodity,” the report recommends that digital assets be treated as a new class of assets for US federal income tax purposes and that certain provisions of the Code that are currently applicable to securities or commodities be amended to apply to digital assets. Specifically, the report recommends that the following provisions be amended to apply to digital assets: (i) section 475 (mark-to-market accounting method for dealers in securities), (ii) section 864(b) (US trade or business safe harbors with respect to trading in securities or commodities), (iii) section 1058 (securities lending safe harbor), (iv) section 7704 (publicly traded partnerships), (v) section 1091 (wash sales rules), and (vi) section 1259 (constructive sale rules).
II. Stablecoins
In light of the recent enactment of the Guiding and Establishing National Innovation for US Stablecoins Act (GENIUS), the report provides several specific recommendations regarding the taxation of stablecoins. The report notes that, while the current US federal income tax classification of stablecoins is not clear, characterizing stablecoins as debt “seems most appropriate” where the stablecoin is structured to be used for payments and may be redeemed for cash, which the report terms a “payment stablecoin.” Because of the unique features of payment stablecoins and their debt-like features, the report generally suggests that legislation be enacted to exempt payment stablecoins from the wash sale rules and the anti-bearer bond rules, such as the registered form requirement under section 163(f). In absence of such legislation, the report encourages Treasury and the IRS to issue guidance clarifying the tax treatment of payment stablecoins and the application of the wash sale rules and anti-bearer bond rules to payment stablecoins.
III. Tax Reporting
The report views current tax information reporting requirements with respect to digital assets as overly burdensome, especially in instances in which the value of digital assets transferred is lower than the cost of compliance, e.g., situations where taxpayers delegate their rights to stake to others and receive frequent small rewards, where a taxpayer receives an unsolicited airdrop of a newly created digital asset as a marketing practice, or where the value of a digital asset is uncertain, such as after a hard fork. Under current law, taxpayers are required to include the fair market value of these assets in income when they have dominion and control over the asset.
To simplify reporting, the report recommends that Treasury and the IRS (i) issue guidance to exempt de minimis receipts of digital assets from US federal income tax reporting requirements, such as the receipt of digital assets from airdrops, staking, hard forks and mining rewards and (ii) review, modify or reverse existing guidance that provides that a taxpayer recognizes income upon receipt of digital assets from staking and mining. The report also notes that because many digital asset exchanges communicate with their customers solely electronically, Treasury and the IRS should propose regulations to provide these exchanges with a less burdensome method of obtaining customer consent to provide electronic payee statements, such as Form 1099-DA. In addition, the report suggests legislative changes to section 6038D, which generally requires an individual to report holdings of certain specified foreign financial assets with an aggregate value of $50,000. The report notes that this provision could be updated to require taxpayers to report digital assets and that reporting under this provision could be streamlined by conforming the information required to be reported under section 6038D and the information required to be reported on the FBAR (the Report of Foreign Bank and Financial Accounts).
The report also proposes implementing additional reporting requirements with respect to digital assets. For example, the report recommends that Treasury and the IRS consider proposing regulations to implement the Crypto-Asset Reporting Framework (CARF), an OECD initiative that generally provides for reporting of digital asset transactions and exchanging this information across jurisdictions. The report also suggests requiring basis information to be reported when digital assets are transferred between centralized digital asset exchanges.
IV. Other Issues
The report also lists several other areas of uncertainty that should be clarified either through new legislation or by issuing additional administrative guidance. These include:
- With respect to the corporate alternative minimum tax, guidance addressing the determination of applicable financial statement income with respect to financial accounting unrealized gains and losses on investment assets other than stock and partnership interests;
- With respect to grantor trusts, guidance addressing whether a trust that otherwise qualifies as an investment trust treated as a grantor trust fails to qualify as such if the trust stakes digital assets owned by the trust;
- Guidance addressing whether wrapping transactions (converting a digital asset native to one blockchain into a digital asset native to a different blockchain) and unwrapping transactions are taxable;
- Guidance as to whether staking activity constitutes a US trade or business for purposes of section 864 or gives rise to unrelated taxable business income (or UBIT) for purposes of section 512;
- Guidance on how to value digital assets that are traded on multiple exchanges or are thinly traded, for purposes of determining the amount realized and basis;
- Guidance on NFTs, such as whether NFTs are treated as collectibles for purposes of sections 408(m) and 1(h)(5);
- Guidance on the application of the investment company rules under sections 351 and 721 to digital assets;
- Guidance on whether digital assets constitute “marketable securities” for purposes of section 731 or “hot assets” for purposes of section 751;
- Guidance expanding the classes of assets that may be held by regulated investment companies to include digital assets; and
- Guidance regarding the treatment of digital assets for purposes of section 951 (subpart F), section 951A (GILTI), and the passive foreign investment company (PFIC) rules.
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