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President Biden’s Greenbook Provides Clarity on Digital Asset Taxation

The Treasury Department’s General Explanations of the Administration’s Fiscal Year 2023 Revenue Proposals (the “Greenbook”) (available here), which elaborates on revenue proposals in President Joe Biden’s Fiscal Year 2023 Budget Proposal, includes tax proposals supporting the trading and lending markets for digital assets as well as expanding information reporting for digital assets, summarized below.

Extension of Nonrecognition Treatment for Lending Actively Traded Digital Assets

  • Under current law, loans of securities do not result in the recognition of gain or loss (either on initial transfer or return) if made pursuant to agreements that meet certain requirements. The Greenbook acknowledges the growing market in lending of digital assets and would expand the scope of Section 1058 to cover loans of actively traded digital assets with terms similar to those of securities loans, effective for taxable years beginning after December 31, 2022. Under the proposal, a lender of digital assets would include the same income as if they held the loaned digital asset directly (presumably, for example, airdrops and hard forks).

Extension of Section 475 Mark-to-Market Accounting to Actively Traded Digital Assets

  • Current law allows commodity dealers and security or commodity traders to elect to use the mark-to-market method (generally recognizing ordinary gain or loss on an annual basis based on the change in value of such securities or commodities). The Greenbook would permit dealers and traders of actively traded digital assets (including cryptocurrencies) and derivatives on or hedges of such assets to elect to use the mark-to-market method. Treasury would determine which digital assets are actively traded. Digital assets would be treated as a new class of assets eligible for mark-to-market treatment and not treated as securities or commodities for purposes of the existing rules.

Extension of FATCA and Foreign Financial Asset Reporting to Digital Assets

  • As part of an expanded information reporting regime, the Greenbook would require brokers (including U.S. digital asset exchanges) to report information relating to the substantial foreign owners of passive entities. This information gathering proposal is intended to facilitate Treasury’s automatic information sharing with partner jurisdictions and the receipt of similar information with respect to U.S. taxpayers from such partner jurisdictions.
  • The Greenbook would also require foreign asset reporting with respect to accounts that hold digital assets maintained by a foreign digital asset exchange or other foreign digital asset service provider. The current $50,000 threshold for foreign asset reporting would be determined based on the aggregate value of such digital assets and any foreign assets within the existing reporting regime.
  • In a recent speech, Treasury Secretary Janet Yellen reaffirmed the need for tax reporting standards for digital assets: “[T]axpayers should receive the same type of tax reporting on digital asset transactions that they receive for transactions in stocks and bonds, so that they have the information they need to report their income to the IRS…” Secretary Yellen’s comments reinforce the general need for tax reporting standards for digital assets, building on those previously enacted in the Infrastructure Investment and Jobs Act (summarized here).
 

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