Stablecoin Boom Fuels Crypto Lobby for Clear Tax Rules

Key Highlights:

• With the GENIUS Act gaining bipartisan support, lawmakers are now looking at clearer tax rules for crypto.
• The crypto industry expressed concerns regarding issue of double taxation for digital assets.
• Now, they are also questioining whether staking rewards should be taxed or not.

Tax reform is now in the sights of lawmakers and digital asset proponents following the recent bipartisan passage of legislation (GENIUS Act) that would give banks and nonbank firms the power to issue stablecoins. Having already reached that milestone, the next thing on the agenda in Washington is how crypto transactions are to be taxed.

The Senate Finance Committee will meet this week to discuss the current structure. The hearing follows one of its two-month postponements after the House Ways and Means Committee had heard industry representatives who complained that the lack of clear direction is causing mainstream financial players to avoid venturing into the industry.

Crypto Industry Raises Concerns Over ‘Double Taxation’

The most controversial matter is the disposition of block rewards designed by mining and staking. Industry officials argue that taxing newly created tokens as they are produced and again as they are sold is discriminatory against the participants.

“It is created property,” said Jason Somensatto, policy director at Coin Center. He added that current guidance reflects “a kind of misunderstanding of the technology and just wrong on the law.”

Sen. Todd Young (R-Ind.) plans to press witnesses on that. The office said that he was especially interested in whether staking rewards ought to be taxed as the harvest of a farmer or the original work of an artist, which is not taxed until sold.

A bill proposed earlier this month by Sen. Cynthia Lummis (R-Wyo.) would provide an exception to taxing mining and staking rewards until disposal. Lummis may not belong to the Finance Committee, but her proposal already attracted the members of the panel, such as Sens. Marsha Blackburn (R-Tenn.) and Bill Cassidy (R-La.). “It is important that we pass a crypto tax law to make certain hostile regulators can never again weaponize government against an asset class they don’t like,” Blackburn said in a statement, according to Bloomberg.

Proposals on the Table

The Lummis bill, known as S.2207, does more than stake rewards. It would provide an exception to taxpayers with less than $,5000 in annual gains or losses in crypto, permit lending to be tax-free, and provide mark-to-market treatment to some trades. Sen. Kirsten Gillibrand (D-N.Y.), who once partnered with Lummis in a bipartisan bill to eliminate tax on staking rewards, called her earlier work “a very good place to start.”

Similar plans are being drafted by other lawmakers. Rep. Max Miller (R-Ohio) announced that he hopes to introduce his own bill on the tax implications of blockchain splits and unsolicited token distributions. The Trump administration working group has also called on Congress to enact a framework under which securities and commodities regulations are applied to digital assets with modified provisions.

Burden of Paperwork to Ensue

The requests for reporting that were enacted in the infrastructure law established in 2021 would start being realized by the end of this year. Those provisions would produce billions of additional filings each year, and treasury officials believe that the effect would be a “tsunami of forms” on both brokers and the Internal Revenue Service.

Unless changes are implemented, industry executives caution that the paperwork will scare away casual users and occupy regulators with it. Lawrence Zlatkin, Coinbase’s vice president of tax, who is scheduled to testify before the Senate Finance Committee, argued that relaxing the regulation would contribute to the expansion of digital assets. “If you want stablecoins to reach their full potential, this is a good way to do that,” he said.

Political Crosscurrents

Although both parties have shown readiness to cooperate, there is still political strife. Democrats of the Finance Committee have expressed worries concerning crime in the sector and warned against rushing. “If we jump too quickly, then we could find ourselves in a position where we can’t bail ourselves out,” said attorney Andie Kramer, who testified on the request of Sen. Ron Wyden (D-Ore.), the committee’s ranking Democrat.

The Lummis bill does include one aspect of revenue generation: the IRS wash-sale rule applied to digital assets, which will prevent investors from buying tokens again at once after recording a loss. That aspect, Tom Shea, head of digital asset tax initiatives at EY, believes “really seems to be the pay-for on some of what I would view.”

Also Read: DoubleZero Receives No-Action Letter for 2Z Token from SEC