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Crypto Trading Safe Harbor – We’re On Our Own

The District of Columbia Bar Tax Legislative and Regulatory Update Conference, a two-day conference on tax legislative and regulatory developments, included a one-and-a-half hour panel on taxation of cryptocurrencies and related reporting issues. Personnel from the U.S. Department of Treasury Office of Tax Policy (Natasha Goldvug, Attorney-Advisor, and Erika Nijenhuis, Senior Counsel), the Joint Committee on Taxation (Jeffrey Arbeit, Legislation Counsel), and the Internal Revenue Service Office of Chief Counsel (Chris Wrobel, Special Counsel to the Associate Chief Counsel, Income Tax & Accounting) participated on the panel, each speaking in an informal capacity rather than from their official positions.

The panelists noted that there are significant legislative and regulatory proposals involving cryptocurrencies, including a reporting regime for digital assets in the recently enacted Infrastructure Bill, legislative proposals in President Biden’s FY23 Greenbook for mark-to-market and taxation of crypto lending, and expanded broker-dealer reporting for cryptocurrencies. The Build Back Better Act also proposes to apply the wash-sale rules and the constructive sale rules to cryptocurrency.  

Tellingly, none of these initiatives provides a proposal for the inclusion of cryptocurrencies under the commodities trading safe harbor, which allows non-U.S. investors to trade in commodities and securities within the U.S. without incurring a net U.S. basis tax. When asked about the absence of any proposal on expanding the trading safe harbor to crypto, one of the panelists noted that the existing proposals are fairly substantial, and if enacted, would require significant regulatory follow-up. The implication of this response is that the tax bar and the investment community may not expect any clarification from the government when it comes to non-U.S. taxpayers investing or trading in cryptocurrencies in the U.S. Accordingly, the tax bar and the investment community will be engaged in difficult line-drawing exercises to determine whether a digital asset is a commodity and whether it is of the type that is traded on a U.S. exchange. The absence of any proposal clarifying the scope of the trading safe harbor is significant and likely indicates that the industry and its advisors are very much on their own going forward.

How to get answers to crypto tax questions

On more than one occasion, the Conference panelists were asked how taxpayers can obtain answers to their tax questions regarding cryptocurrencies. Private letter rulings were put forward as one approach to seeking such answers. Notably, one government panelist discussed the information sources that the government looks to, including social media and publicly available articles. In this context, the panel reminded listeners that the Internal Revenue Service (“IRS”) is now drafting its 2022-2023 Priority Guidance Plan and that taxpayer recommendations for guidance items to be included in the Plan must be submitted by June 3, 2022. This is an indication of one avenue in which to raise the IRS and Treasury’s awareness on pressing cryptocurrency issues. The broader and more impactful that the issues are in the retail market, it seems the more likely that the government would be inclined to address those issues.

 

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