Coinbase Makes Recommendations on Digital Asset Taxation

September 7, 2023

Senator Ron Wyden
Chairman, Committee on Finance
United States Senate
Washington, D.C. 20510

Senator Mike Crapo
Ranking Member, Committee on Finance
United States Senate
Washington, D.C. 20510

Re: Digital Asset Taxation

Gentlemen,

Coinbase Global, Inc. and its affiliates (“Coinbase”) welcomes the opportunity to submit responses to your questions dated July 11, 2023 related to digital asset taxation. In addition to our responses below, we have prepared proposed legislation that would address questions raised in your letter and which we believe would advance the United States as a continuing emerging technologies hub with forward-thinking tax policy.

The focus of this letter is our response to the questions raised in your July 11 letter. However, we would be remiss in not raising concern about the recently released Proposed Regulations to the broker reporting rules of Section 6045 of the Code¹. We intend to submit a comprehensive comment letter to the Treasury Department on these regulations, but we would like to stress for you and your colleagues that the expansion of the broker reporting architecture in these regulations well exceeds the legislative intent of these rules when they were passed in 2021 and raises serious privacy concerns.

In a letter from the Treasury Department's Assistant Secretary for Legislative Affairs to six U.S. Senators sent on February 11, 2022, Treasury promised not to overreach in future regulations. The February 11 letter stated that the Treasury Department would address concerns raised in Senator Portman's 2021 colloquy. We believe that the proposed rules do not adequately address these concerns.

The original tax reporting architecture was designed to report on financial assets, but the proposed regulations cover any asset that is recorded on a cryptographic ledger, regardless whether it is used for payment or investment purposes. It covers all stablecoin transactions, even when gain or loss is clearly absent. And, it covers digital asset payment processors even though they have no customer relationship in the use of digital assets in commerce. In addition to discussing the scope of this letter, we would welcome the opportunity to discuss our comments to the section 6045 proposed regulations with you.

ABOUT COINBASE

Coinbase constitutes the largest crypto platform in the United States, and among the largest globally, for customers to buy, sell, hold and trade crypto-assets. Our mission is to increase economic freedom in the world. We build and provide safe, trusted, easy-to-use technology and infrastructure products and services that enable any person or business with an internet connection to discover, transact, and engage with crypto-assets and decentralized applications. We work with regulators globally to ensure our products provide access to the cryptoeconomy and serve as a critical infrastructure layer to Web3. Customers that start with us grow with us as they experience the benefits of crypto-based products for trading, staking, spending, and transacting in crypto in a growing number of use cases.

DISCUSSION

Our responses below address the questions from your letter in the order in which they were presented. In addition, we have included a description of digital identity tokens at the end of the letter that we believe is important to advance the industry and tax compliance administration. We welcome the opportunity to discuss our views on these questions. In addition, our proposed legislative language addresses additional topics that are critical to grow the cryptocurrency industry in the United States, and we have included our views about these items in our letter to further the broader policy discussion.²

We would recommend making changes to the treatment of digital assets by defining digital assets and the rules regarding their tax treatment in a new set of Code sections reserved for digital assets. This would ensure simplicity and certainty, versus grafting on any proposed treatment of digital assets on existing rules. Because certain digital assets are financial in nature while others are not, it would allow for these differences to be governed by more appropriate tax rules regarding their character and use through a new section of the Code. We have included proposed legislation enacting this recommendation as an attachment to this letter.

Digital assets come in multiple “favors,” reflecting the usage for the asset or platform, the regulatory context, and the attributes of the digital asset. In general, U.S. tax principles attempt to characterize assets based on their function and attributes. For this reason, guidance is needed to assign particular crypto assets to a category for tax purposes that most resembles their character. This would contribute to reaching a tax result most appropriate to the function and use of such assets in the digital asset economy. We have not separately addressed one subset of the digital asset economy, NFTs, in this letter and believe that rules related to NFTs should be issued separately through Congressional and/or IRS administrative guidance, such as the IRS's recently-issued Notice 2023-27.

A. 475 Mark-to-Market for Dealers and Traders

In 1993, Congress enacted section 475 to require dealers in securities to mark-to-market their inventory at the end of each year. Four years later, Congress expanded section 475 to allow for securities traders, commodities dealers, and commodities traders to be covered by the mark-to-market rule on an elective basis. The legislative history of section 475 recognizes the need for a simplified system that allows for a shift away from a realization tax system for certain categories of assets.

The implementation of mark-to-market accounting establishes the principle of a “clear refection of income”. The same policy implemented in the 1990s to securities and commodities should be applied to digital assets. The uncertain application of existing section 475 to digital assets requires active dealers and traders in digital assets to make their own determination of whether the applicable digital asset(s) qualify as securities or commodities for U.S. tax purposes under the current mark-to-market regime. President Biden's Administration recognized the importance of extending the mark-to-market regime to digital assets with the inclusion of this rule in the Fiscal Year 2024 Green Book.³

Although this mark-to-market regime reflects a departure from the typical realization-based tax accounting system, the regime simplifies certain rules for taxpayers. For example, a taxpayer who makes a mark-to-market election “turns off” the application of a number of tax rules like section 1256 and the wash sale rules of section 1091. We include a recommendation on wash sales below and believe that the application of any such rule to digital assets should be paired with a comprehensive digital asset tax bill that includes a mark-to-market rule for digital assets.

We recommend that Congress add a new category for digital assets that may be marked-to-market at the election of the dealer or trader in those digital assets. This new category would include any actively traded digital assets, including any derivatives or hedges of such digital assets. We recommend that this definition of actively traded digital assets be broadly drafted to include any centralized or decentralized exchange that has reliable trading prices and trading volume.

B. Section 864(b)(2) Trading Safe Harbors

A non-U.S. investor who is engaged in a U.S. trade or business generally will be subject to U.S. tax on all “effectively connected” income with such trade or business. A U.S. trade or business generally is any activity that is conducted for profit on a regular, considerable, and continuous basis. Trading activity that would otherwise be treated as creating a U.S. trade or business is excluded if it falls within certain securities or commodities trading safe harbors. The safe harbors exclude the trading securities and commodities income from being treated as effectively connected income, even if a U.S. resident broker or agent conducts the trades.

In 1936, Congress introduced the existing safe harbors to incentivize the growth of a U.S. trading and asset management community for global traders in financial assets. Congress expanded the safe harbors in 1966 to include trading activities conducted by or on behalf of a non-U.S. person through a U.S. office for the non-U.S. person's own account. This rule provides certainty that non-U.S. persons who trade stocks, securities, and commodities would not be subject to the U.S. net income tax regime. Similar principles should apply to foster the growth of a digital asset trading and asset management community in the United States rather than push the industry to invest capital, jobs, and resources outside of the United States.

The current safe harbors arguably cover certain digital assets based on their trading market and regulatory status in the United States, but there is significant uncertainty overall and the current safe harbors likely would not cover all digital assets. The trading safe harbor should be applied to non-U.S. persons trading in all digital assets, regardless of whether they constitute securities or commodities for U.S. tax purposes or other types of property. Such an application would create consistency in the U.S. tax treatment of non-U.S. persons for similar asset classes.

We recommend a standalone digital asset trading safe harbor that would be added to complement the existing securities and commodities safe harbors in section 864(b). We believe that inclusion in the commodities trading safe harbor (rather than adding a standalone digital asset trading safe harbor) would require material adjustments to conform the provision with the dealing or trading of digital assets. For example, the commodity trading safe harbor requires that the assets being traded be “of a kind customarily dealt in on an organized commodity exchange” and that the transaction be of a kind “customarily consummated at such place.” We do not believe those types of restrictions should apply to digital assets. Because digital assets are a new form of transacting in the financial markets, we believe that it is more appropriate to create a new safe harbor rather than attempting to conform the long-standing securities and commodities safe harbors to digital assets.

C. 1058 Digital Asset Loans

Liquidity is critical to any properly functioning financial market. The ability to lend, or make available for use, assets held by investors is critical in supporting market liquidity. Currently, two major areas of crypto lending market activity include institutional loans of digital assets and pools of digital assets available for over-collateralized lending. This market currently includes billions of dollars of digital assets.

The lack of clear tax rules applicable to digital asset lending, and the risk that lending could be treated as a deemed sale of the loaned digital assets, creates a chilling effect on much needed market liquidity in the digital asset market. The institutional loan market generally has adopted forms of master loan securities agreements available for securities loans between institutional borrowers and lenders. Decentralized finance (DeFi) protocols and lending pools include the terms or conditions of any loans within the blockchain smart contract.

A taxpayer could rely on pre-section 1058 guidance to conclude that nonrecognition tax treatment should apply to digital asset lending. As an example, in 1976, the IRS issued a GCM⁴ and concluded that the return of securities to the lender that were not materially different from the transferred securities would not result in a section 1001 realization event for the lender. Congress added section 1058 to the Code in 1978 to clarify the treatment of securities loans and provide for nonrecognition treatment for those loans that satisfy certain requirements.

President Biden's Administration recognized the importance of extending the existing tax principles of securities lending to digital asset lending with the inclusion of this type of rule in the Fiscal Year 2024 Green Book. The Administration stated that the lending market has expanded over time to digital assets and that, in furtherance of this market expansion, section 1058 should be amended to include digital assets.

The treatment of hard forks and air drops in the context of digital asset loans raises both practical and technical issues. Not all hard fork and air drops are inherently part of the underlying digital asset rights, and often can be de minimis or promotional in nature. We recommend including limitations to ensure that borrowers and lenders could comply with any hard fork and airdrop rule included in an expanded section 1058 without impacting the nonrecognition treatment of the loan.

First, we recommend that Congress consider a rule that would only require a borrower to pass-through the asset at the request of the lender (within a certain period of reasonable notice) to eliminate issues created by immaterial and promotional hard fork or airdrop assets. We believe this is a common sense rule and a practical approach to allow for the borrower and lender to reach an arm's-length agreement on the appropriate way to address any hard fork and airdrop assets. If there is not a blanket rule that would allow for the borrower and lender to agree on hard fork and airdrop terms without impacting the nonrecognition treatment, the borrower should not be required to pay immaterial assets (e.g., below 10% of the digital asset loan principal) to the lender. Additionally, the borrower should not be required to pay any hard fork or airdrop assets if the loaned digital asset is held on an exchange that does not support or custody such digital assets (whether due to technical reasons or legal restrictions).

The lender should be required to take into account income upon delivery by borrower and receipt by the lender (who is on the cash method of accounting) of any hard fork or air dropped assets. If the lender does receive the asset (for example, because it does not request it, in cases where pass-through is required only upon request), the borrower would be required to take into account the income from the hard forked or airdropped asset upon taking dominion and control of the asset (under current IRS administrative guidance on digital assets).

In addition, the lending fee paid with respect to digital assets should be sourced with respect to the residence of the lending party. The lack of guidance regarding the “source” of fees paid for such loans generally disadvantages U.S. digital asset borrowers who may need to “gross up” foreign lenders and thus incur higher costs of capital than their foreign counterparts. Traditional capital markets solve this issue for US borrowers through the broad “portfolio interest” exception to withholding which similarly ensures that US borrowers do not have a higher cost of capital when tapping the global markets.

D. 1091 Wash Sales and 1259 Constructive Sales

We generally agree that a digital asset tax bill should include certain “wash sale” and “constructive sale” provisions, which would generally be similar to how these rules apply to financial assets in “TradFi,” the traditional or existing financial system. However, the passage of any wash sale rule or constructive sale rule for digital assets should be part of an overall digital asset legislative passage and should not be included by itself as a revenue raiser in a non-digital asset bill.

We would note, however, that implementing a wash sale rule for digital assets would be significantly more burdensome than the similar rule that applies to stocks and securities. As described in our introduction to this letter, the type of use cases for digital assets is extremely broad and the full potential scope for use cases of digital assets is evolving as a rapidly-growing emerging technology. Because digital assets can be used in a variety of ways, including as a medium of exchange (e.g., to purchase a cup of coffee), the tracking and managing of an individual's potential wash sales could be an extremely burdensome endeavor. This type of multifaceted use of assets does not occur in TradFi and reflects the broader and more innovative scope of digital assets. Congress should evaluate whether the benefit of any digital asset wash sale rule would outweigh the significant tax compliance burden of any such rule, and we would recommend the inclusion of a de minimis exception to maximize compliance without adversely affecting the overall policy of including a wash sale rule for digital assets. Alternatively, the application of wash sale rules could be limited to digital assets that are financial in nature, such as those that are used as investments.

In particular, if Congress passes a wash sale rule, the mark-to-market section 475 regime should be explicitly expanded to cover actively traded digital assets. Consistent with the existing rules applicable under section 475 for securities, a mark-to-market election would permit a taxpayer to “turn-off” the application of the wash sale rules to digital assets for any digital assets in this regime.

E. Timing and Sourcing for Staking and Mining

On a Proof of Stake (“PoS”) platform, staking is the mechanism by which transactions are validated and added to the network. PoS platforms developed as an alternative to the “proof of work” (“PoW”) consensus mechanism to validate (or process) transactions on the blockchain. In a PoW consensus mechanism (like Bitcoin), miners run software on their servers and earn the ability to validate transactions by being the first miner to solve a complex math problem. This technology is viewed by some as (relatively) slower, resource constrained and difficult to scale.

To address these challenges, a PoS platform operates by validating transactions more efficiently through running “nodes” where transactions are processed. In order to run a node and validate transactions, validators must “stake” a certain amount of the platform's digital assets — “locking it up” on the PoS platform for a certain period of time in a smart contract (i.e., a computer program that is published on a blockchain and is executed by node operators). Nodes that incorrectly validate a transaction or fail to remain online can lose all or a part of their stake through a penalty called “slashing.”

Generally, the more digital assets that are staked, the more safe and efficient the blockchain becomes. In order to increase the amount of digital assets staked, validators can stake digital assets they own or can stake digital assets delegated to them.

Today, staking digital assets is a challenge for most users because it generally involves running a node, owning and operating certain hardware and funding the minimum threshold for transaction sizes for validation. A number of digital asset exchanges (including ours) and other platforms offer services related to staking to its users where the exchange or platform (or third party validators) stakes digital on the user's behalf, taking responsibility for all activities associated with running the node.

The IRS has taken the position that new digital assets created through staking results in taxable income to the recipient of the applicable rewards on the date of receipt. In a challenge to the IRS's position, Jarrett v. United States⁵, the taxpayer argued that tokens rewarded from staking should be treated similarly to self created property and, therefore, should be taxable when sold and not when received. This taxpayer analogized staking to a farmer who harvests wheat and who does not recognize income until a subsequent sale of the crop. The industry also has analogized treating new digital assets received in staking like a stock split under section 305(a) of the Code, which typically does not result in the recognition of upfront income. After commencing the District Court case, the IRS decided to refund the taxpayer for the tax amount in controversy. The District Court dismissed the case (affirmed by the Sixth Circuit of the U.S. Court of Appeals) as moot since the taxpayer received a refund of its tax claim, despite the issue being raised. The digital asset industry typically has favored the taxpayer view of taxability when sold and not when received.

The IRS recently released Revenue Ruling 2023-14, where it memorialized its position that a cash basis taxpayer is required to include in income tokens from staking when the taxpayer has “dominion and control” over the tokens, rather than when the tokens are sold. The IRS's position relies on a broad definition of income under section 61 of the Code and their view that staking is covered as “undeniable accessions to wealth, clearly realized, and over which the taxpayers have complete dominion” under Glenshaw Glass.⁶ This position generally is disfavored by the digital asset industry because it creates immediate upfront “phantom” income and can economically force a sale of digital assets to cover any taxes due. In certain circumstances, the IRS's position can be taxpayer favorable by establishing an immediate fair market value tax basis that initiates the holding period for a taxpayer who may be entitled to long-term capital gain with respect to any appreciation with respect to such asset after the initial date of receipt.

Because of disagreement on the appropriate tax framework between the IRS's position and certain taxpayers (as in Jarrett), we believe that this area is ripe for Congress to exercise its authority to codify a position to clarify whether the IRS position (as memorialized in its recent Revenue Ruling 2023-14) or the Jarrett position represents Congress's view of the proper staking income tax policy.

If Congress elects to provide deferral to taxpayers involved in staking until sale, we have suggested an amendment to section 451 of the Code that would codify that income related to staking should be taken into account only when the taxpayer disposes of the tokens received from staking, not when the tokens are rewarded.

The character of the rewards should not vary when an individual stakes on their own vs through a pool; the character of the income should remain the same. The source of staking rewards for non-US persons who stake through U.S. validators should be treated as the location of the recipient. This would align the sourcing rule for staking with the sourcing rule for notional principal contracts. We also believe that this would incentivize location of the ever-growing and highly-mobile staking business in the United States. A source rule that makes non-U.S. recipients subject to U.S. withholding tax on investments in staking protocols would drive staking businesses outside of the United States, as it would be impossible for them to compete with non-U.S. staking service providers. For example, a rule that uses the location of servers as a basis for sourcing would effectively require validators to be located on computer servers located outside of the United States, thereby forcing significant commercial activity abroad. Anecdotally, we have observed this exact behavior in the market already, due to the uncertainty in the application of current U.S. tax law to staking. It is critical that the United States establish itself as a hub for emerging technology and investment.

Generally, our view is that non-U.S. residents should not be engaged in a trade or business if they are participating in staking-as-a-service. Under the proposed clarification that staking rewards results in non-U.S. source income, this would provide a rule of simplicity for taxpayers who generally would have limited hallmarks of engaging in a U.S. trade or business. Non-U.S. residents who established their own validators to engage in staking or mining would be governed by existing U.S. trade or business case law that examines the facts and circumstances applicable to the arrangement.

In response to your request for comments on the excise tax on mining, we believe that it is against the long-term interests of the United States to impose punitive taxes on a growing and evolving technology/industry. Similar to commentary on U.S. trade or business and sourcing issues, failure to address the growing digital asset industry may lead to a decline in investment in the United States, which has already begun occurring, as widely publicized in the mainstream media with large market participants electing to set up operations in the United Kingdom and the European Union.

F. 988(e) Nonfunctional Currency

Current law provides a tax exclusion for tax de minimis gains from foreign currency held for personal use (for example, Euros brought back from a European vacation). These de minimis gains from foreign currency are excluded mainly for administrative reasons since being required to report them imposes large tax fling burdens in exchange for minimal tax revenue.

As a result of mainstream adoption of cryptocurrency as a medium for payment (similar to foreign currency), a de minimis rule should also be provided to exclude gains and losses on an annual basis up to a certain minimal threshold (e.g., $600 in the aggregate) or up to $100 per transaction. Similar to foreign currency, a de minimis requirement would help reduce administrative burdens for transactions that would only result in minimal tax revenue to the government. In addition, the elimination of the need for reporting supports the adoption of various digital assets in payment use cases. We also recommend that the rule should be mandatory for all taxpayers to avoid a situation where taxpayers may cherry pick fact patterns where they elect into the regime for certain tax years (or fact patterns) and elect out for other years.

To address concerns that this type of rule may provide benefits to high-income taxpayers, we would support an income threshold where the de minimis rule would not apply to taxpayers with certain levels of adjusted gross income. Although this rule would add complexity to a de minimis rule, the goal would be to exclude at least the substantial majority of taxpayers from the burden of tracking small or microtransactions over the year.

We believe that $100 per transaction is a reasonable threshold for ordinary course transactions. Establishing a per transaction threshold allows taxpayers to avoid the administrative burden of tracking all microtransactions that could trigger an aggregate annual threshold. In addition, existing anti-avoidance rules in the Code could address the ability for any taxpayer to avoid any tax obligations.

G. FATCA and FBAR

The application of FATCA, FBAR, and Form 8300 reporting related to digital assets should be clarified to eliminate its ambiguity. However, we caution that the addition of new rules to FATCA, FBAR and Form 8300 addressing digital assets should balance whether the burden of implementation/complexity outweighs the benefits. As a comparison of a similar non-U.S. information reporting tax regime that has provided clarity, the Organization for Economic Co-Operation and Development (OECD) has provided guidance on the Common Reporting Standard (CRS) in relation to digital assets through a new regime, the Crypto Asset Reporting Framework (CARF), including expanding the definition of a depository institution and investment entity. Many of these rules are more appropriately tailored to the digital asset economy, such as the recognition of limitations in reporting when digital assets are used in commerce.

Because the Treasury Department has recently released the section 6045 proposed regulations that would cover information reporting with section 6045, we recommend close coordination with these section 6045 rules to ensure that there is no duplicative reporting or the introduction of burdensome requirements under CARF, FATCA, FBAR, or Form 8300 reporting.

H. 170 Valuation and Substantiation

Charitable donations of digital assets should be encouraged to assist qualified organizations to further their exempt purposes. A Fidelity study found holders of digital assets are disproportionately more charitable as investors, with 45 percent donating $1,000 or more to charity in 2020, compared to 33 percent of the entire investor population.⁷ This statistic aligns with the demographic ownership of digital assets: Millennials and Gen Z investors are more likely to hold digital assets and are more inclined to make charitable donations. Thousands of charities currently accept donations of digital assets, including many well-known charities like the American Heart Association, March of Dimes, and Save the Children. Established charities have proven that they are ready to accept the donation of digital assets and legislative tax change would further encourage this new opportunity for giving to charities.

Under current law, a taxpayer who donates stock to a public charity would be entitled to a tax deduction for the full fair market value of the stock based on market quotations. For donations of property that is not publicly traded securities (other than cash), a donor is required to obtain a qualified appraisal. Under current law, potential donors would be required to obtain a burdensome appraisal for donations of digital assets. The donor is required to attach a Form 8283 to the tax return to support a digital asset charitable deduction.

Digital assets have a trading price that is easily discoverable through centralized and decentralized exchanges with transactions recorded on the blockchain in a permanent record that can be used for record-keeping purposes.

An updated rule for digital assets could provide donors with a rebuttable presumption that charitable donations of digital assets would be entitled to a tax deduction for the full fair market value (as of the date of the contribution) based on market quotations that are readily available on established centralized and decentralized digital asset exchanges. This change would eliminate the requirement on larger donations to seek appraisal for digital assets. Appraisals make sense when donations are intangible items such as artwork or intellectual property, but digital assets have an established value at the time of death or gift based on the market price at that time. Because the value of digital assets can be more easily obtained, Congress should eliminate an appraisal requirement for large cryptocurrency donations.

Typically, there is limited discrepancy between prices on exchanges for the same digital asset because investors and traders have economic incentives to use arbitrage opportunities that close this gap. Congress could grant the IRS a right to rebut the presumption that the reported valuation from a digital asset exchange represents the fair market value with clear and convincing evidence that the exchange, clearinghouse or platform used to obtain the fair market value does not represent an accurate fair market value.

Pursuant to existing regulatory authority under section 170(f)(11)(H), the Treasury regulations could describe the specific types of centralized and decentralized exchanges that would qualify as providing reliable market quotations or include certain documentation necessary for digital asset donations (e.g., information available on Etherscan to identify all of the relevant cryptographic information). The time of the transaction would have a clear date and time stamp that would be obtained, and maintained for record-keeping, through a source like Etherscan (a popular website that tracks and maintains records of digital asset transactions). The list could include a descriptive criteria, such as exchanges that hold money transmitter licenses in the United States, or could include the specific identification of digital asset exchanges that qualify (the IRS could periodically release a list of exchanges a list that satisfies this criteria).

I. Tax Attestation Token

Finally, the issues above are relevant for transactions occurring through both centralized digital asset exchanges and DeFi protocols. Although we do not intend to provide detailed comments on the section 6045 proposed regulations in this letter, a number of digital asset participants treated as “brokers” in the proposed regulations may struggle with obtaining the relevant tax identification requirements (regarding Form W-9 or Forms W-8) when a payment is made by the protocol to a user. In DeFi and peer-to-peer platforms, the protocol facilitates direct peer-to-peer  transactions on a public decentralized blockchain network without an intermediary and no current systems are enabled to allow for tax form collection or similar tax-related attestations.

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Sample Legislative Text With Section-by-Section Summary

Responsible Financial Innovation Act

* * *

Title II — Responsible Taxation of Digital Assets 

Sec. 201. Taxation of Digital Assets

(a) In General. — Subchapter W of chapter 1 of the Internal Revenue Code of 1986 is amended by inserting the following new section 1400:

(1) Section 1400

(a) Definitions

1. Digital Asset — The term digital asset means any fungible digital representation of value which is recorded on a cryptographically secured distributed ledger or any similar technology as specified by the Secretary.

2. Staking Reward — For purposes of this title, the term staking reward means any digital asset received in consideration for making available the taxpayer's digital asset to support validation of transactions on a cryptographically secured distributed ledger.

3. Wrapped Token — For purposes of this title, the term wrapped token means any digital asset for use on a non-native blockchain (i) received in exchange for tender of a different digital asset; and (ii) for which the issuer holds the tendered digital asset in a trust (or through a similar arrangement) on a 1:1 basis with the issued digital asset (either in a separate digital asset wallet or through immobilization through the smart contract creating the wrapped token).

(b) Certain Dispositions of Digital Assets by Individuals

4. In General. — Gross income of an individual shall not include [gain] [an amount computed by reference to the amount realized], from the disposition of digital assets (as defined in paragraph (a)(1)) used in a personal transaction (as such term is defined in section 988(e)). The preceding sentence shall not apply if the [gain] [fair market value of the digital assets on the date of the personal transaction] [ which would otherwise be realized on the transaction] exceeds [$600/$100].

(c) Treatment as Personal Property

5. In General. — A digital asset (as defined in paragraph (a)(1)) traded on any cryptocurrency exchange, clearinghouse or platform where such transactions are typically consummated shall be treated as actively traded personal property (as defined in section 1092(d)(1)).

(d) Transfers of Digital Assets under Certain Agreements

1. In General. — In the case of a taxpayer who transfers digital assets (as defined in paragraph (a)(1)) pursuant to an agreement which meets the requirements of paragraph (d)(2), no gain or loss shall be recognized on the exchange of such digital assets by the taxpayer for an obligation under such agreement, or on the exchange of rights under such agreement by that taxpayer for digital assets identical to the digital assets transferred by that taxpayer.

2. Agreement Requirements. —

In order to meet the requirements of this subsection, an agreement shall-

a. provide for the return to the transferor of digital assets identical to the digital assets transferred, including a fixed-term agreement;

b. require that payments shall be made to the transferor of amounts which the owner of the digital assets would have been entitled to receive (if such assets are supported on the applicable exchange) during the period beginning with the transfer of digital assets by the transferor and ending with the transfer of identical digital assets back to the transferor;

c. not reduce the risk of loss or opportunity for gain of the transferor of the digital assets; and

d. meet such other requirements as the Secretary may by regulation prescribe.

3. Basis. — Property acquired by a taxpayer described in paragraph (d)(1), in a transaction described in that paragraph, shall have the same basis as the property transferred by that taxpayer.

4. Source of income related to consideration received. — The source of any income related to consideration received from entering into an agreement described in paragraph (d)(1) shall be determined by reference to the residence of the taxpayer.

5. Special rule for wrapped tokens — the rules of paragraph (d)(1) apply to the transfer of a digital asset in exchange for a wrapped token (as defined in paragraph (a)(3) above).

(e) Characterization of Decentralized Autonomous Organizations. In General. — A decentralized autonomous organization shall not be subject to taxation under this chapter and for purposes of this chapter shall not be considered a corporation, business entity or as a person as defined in section 7701(a)(1).

(f) Valuation Safe Harbor for Digital Assets — For purposes of sections 170 (charitable deductions), 475 (mark to market for digital assets), 2031 (value of gross estate) and 2512 (valuation of gifts), the taxpayer may presume that the fair market value of the digital asset is the price on which it is trading on any cryptocurrency exchange, clearinghouse or platform where such transactions are typically consummated. Both the Commissioner and the taxpayer may rebut this presumption only by presenting clear and convincing evidence that the price at which the digital asset purchases and sale could be consummated on which exchange, clearinghouse or platform does not represent the price at which the taxpayer could transact (taking into account liquidity and blockage discounts, if applicable).

(b) Effective Date. — The amendments made by this section shall apply with respect to transactions entered into after December 31, 2022.

Sec. 202. Provisions to support the efficient investment and gifting of digital assets

(a) In General. — The Internal Revenue Code of 1986 is amended by inserting the following:

(1) Charitable Contributions. — Subclause (I) of section 170(f)(11)(A)(ii) of the Internal Revenue Code of 1986 is amended by inserting “, digital assets (as defined in section 1400(a))” after “6050L(a)(2)(B))”.

(2) Section 408(m) is amended by adding at the end of such subsection the following new subparagraph:

“(4) Exception for Certain Digital Assets — For purposes of this subsection, the term “collectible” shall not include any digital asset described in section 1400(a) of the Internal Revenue Code of 1986.”

(3) Section 414 is amended by adding at the end of such section the following new subsection:

“(aa) Rules relating to Digital Assets. — For purposes of this part, the acquisition by —

(1) an individual retirement account (as defined in section 408(a)), or

(2) an individually-directed account under a plan described in section 401(a),

of a digital asset (as defined in section 1400(a)) shall not be treated as a distribution from such account.”

(4) Section 475 is amended by redesignating paragraph (g) to (h) and adding at the end of such section the following new subsection:

(g) Election to Mark to Market for Dealers and Traders in Digital Assets —

1) In the case of a dealer in digital assets (as defined in section 1400(a)) who elects the application of this subsection, this section shall apply to digital assets held by such dealer in the same manner as this section applies to dealers in securities under paragraph (a) of this section.

2) In the case of a person who is engaged in a trade or business as a trader in digital assets and who elects to have this paragraph apply to such trade or business as a trader in digital assets (as defined in section 1400(a)), paragraph (f)(1) of this section shall apply to digital assets held by the trader in connection with such trade or business in the same manner as paragraph (f)(1) applies to securities held by a trader in securities.

3) This paragraph (g) is limited to digital assets treated as actively traded personal property (within the meaning of section 1092).

(5) Subsection (b) of section 512 is amended by adding at the end of the following new paragraphs:

“(21) There shall be excluded all payments received with respect to digital assets (as defined in section 1400(a)), including — but not limited to:

(i) payments received with respect to digital assets agreements (as defined in section 1400(d)),

(ii) amounts received from the use of digital assets (as defined in section 1400(a)) (including staking rewards (as defined in section 1400(a), amounts labeled as interest or consideration for rehypothecation of such digital assets), and

(iii) any additional digital assets received or credited to the account of the taxpayer by virtue of holding the digital assets.

(22) There shall be excluded all gains and losses recognized in connection with the sale, disposition, transfer or other realization event with respect to digital assets.”

(6) Section 514 is amended by adding at the end the following new paragraph:

“(10) Certain Digital Asset Agreements — For purposes of this section, any income or gain recognized with respect to a digital asset agreement described in section 1400(d) shall be deemed derived from the digital asset that is the subject of the agreement, and any obligation to return the digital asset, or related collateral, shall not be treated as “acquisition indebtedness” (as defined in paragraph (1)).”

(7) Section 864(b)(2) is amended as follows:

(a) Redesignating paragraph (C) as (D) and new paragraph (C) below is added: “(C) Digital Assets —

(i) In general — Trading in digital assets (as defined in section 1400(a)) through a cryptocurrency exchange, clearinghouse, platform, resident broker, commission agent, custodian or other independent agent.

(ii) Trading for the taxpayer's own account — Trading in digital assets for the taxpayer's own account, whether by the taxpayer or his employees or through a resident broker, commission agent, custodian or other agent, and whether or not any such employee or agent has discretionary authority to make decisions in effecting the transactions. This clause shall not apply in the case of a dealer in digital assets.

Sec. 203. Conforming Amendments

(a) Internal Revenue Code of 1986. —

(1) Taxable Year of Inclusion. — Section 451 of the Internal Revenue Code of 1986 is amended by adding at the end of the following new subsection:

(1) Taxable Year of Inclusion. — Section 451 of the Internal Revenue Code of 1986 is amended by adding at the end the following new subsection:

“(l) Deferral of Income Recognition for Digital Asset Activities. — In the case of a taxpayer who conducts digital asset mining or staking activities, the amount of income relating to such activities shall not be included in the gross income of the taxpayer until the taxable year of the disposition of the assets produced or received in connection with the mining or staking activities.”.

(2) Section 6045(g)(3)(D) is amended by inserting “fungible” after “any” and before “digital”.

(b) Effective Date. — The amendments made by this section shall apply with respect to taxable years beginning after December 31, 2022.

Section 204. Provision on loss for Irrecoverable or Non-Accessible Digital Assets

Section 1001 of the Internal Revenue Code of 1986 is amended by adding at the end of the following new subsection:

(d) (1) For purposes of this Section, where it is reasonable to consider digital assets (as defined in Section 1400) to be irrecoverable or non-accessible (regardless of the reason), a taxpayer shall be entitled to make an election under this section to deem the digital assets as having been disposed under section (a) for all purposes of the Code for zero consideration.

(2) If any digital assets were deemed disposed under section (1) and are subsequently recovered by the taxpayer or the taxpayer regains access, the taxpayer shall recognize income equal to the fair value of the digital assets.

(3) No amounts shall be claimed as losses under Section 165 or other provisions with respect to digital assets for which an election is made under section (1).

(4) Any reimbursements from a third party or insurance claims shall be treated as income with respect to any digital assets for which an election is made under section (1).