juillet 19 2023

Into the Woods: US Congress Provides a Roadmap to Solving Cryptocurrency Tax Issues


Many aspects of the US federal income taxation of cryptocurrency and non-fungible token transactions are uncertain. So much so that in June 2023, the Joint Committee of Taxation (the “JCT”) issued a White Paper to assist Congress in both identifying and resolving such uncertainties.1 Not coincidentally, senators Cynthia Lummis and Kirsten Gillibrand have (again) proposed legislation that would bring more clarity to the taxation of digital asset transactions.2 While today even the most banal pieces of legislation seem to get weighed down with culture war riders, it’s certainly worth examining these developments to see what we can expect if and when Congress acts in this realm. These developments also shed light on how the Internal Revenue Service (the “IRS”) is likely to interpret existing rules as applied to cryptocurrency transactions.

I. The JCT Report

The JCT Report covers nine issues of keen importance to cryptocurrency market participants: (1) the mark-to-market election for dealers and traders; (2) the trading safe-harbor for non-US investors; (3) loans of digital assets; (4) wash sales; (5) constructive sales; (6) the de minimis safe-harbor for gains from the dispositions of non-functional currencies; (7) the timing and source of income from staking; (8) the valuation of charitable contributions of digital assets; and (9) FBAR and FATCA reporting. We’ll explore each of these topics in turn.

A. The Mark-to-Market Rules

Code § 475(e)(1)3 provides that a dealer in commodities may elect to use mark-to-market accounting for federal income tax reporting purposes.4 Concomitantly, Code § 475(f) allows traders in commodities to elect to use mark-to-market accounting. For those familiar with the rules for securities dealers, these Code sections provide that the rules apply in the same manner as Code § 475(a) applies to a dealer in securities. The mark-to-market election only applies with respect to commodities that are actively traded.5 The JCT Report finds that the application of the mark-to-market election for cryptocurrencies is “uncertain,” apparently because the JCT believes that it is uncertain as to whether cryptocurrencies should be considered to be actively traded for federal income tax purposes. In contrast, the actions of the Securities and Exchange Commission support the conclusion that cryptocurrencies are actively traded, as it has sued centralized cryptocurrency exchanges for running unregistered exchanges.6

The use of mark-to-market accounting results in all gains and losses being treated as ordinary in character, even if the digital assets in the hands of a trader are capital assets. Mark-to-market accounting can be a double-edged sword, beneficial when losses are accelerated and converted to ordinary, and disadvantageous in that gains are accelerated and long-term capital gain treatment becomes unavailable.

B. The Trading Safe-Harbor

Code § 882(a)(1) imposes the regular corporate tax specified by Code § 11 (as well as certain other taxes) on net income earned by non-US corporations that is effectively connected with the conduct of a trade or business within the United States. However, even though trading in certain commodities for one’s own account (i.e., acting as a commodities trader) otherwise constitutes a trade or business for general US tax purposes,7 Code § 864(b)(2) provides that the conduct of these activities in the United States by a foreign person is not treated as the conduct of a US trade or business for purposes of the tax imposed by Code § 882(a):

“A foreign person who trades . . . commodities for the persons’ own account . . . generally is not considered to be engaged in a US business so long as the foreign person is not a dealer in . . . commodities.”8

Specifically, a non-US person is not treated as engaged in a trade or business within the United States if the activities of such person are limited to effecting certain commodity transactions in the United States for the taxpayer’s own account, regardless of whether the person conducting the trading in the United States has discretionary authority to make decisions in effecting the transactions, and regardless of whether the such transactions are affected:

(1) by the taxpayer itself while present in the United States;

(2) by employees of the taxpayer, whether present in the United States or not; or

(3) by a broker, commission agent, custodian, or other agent of the taxpayer, whether dependent or independent, resident or nonresident, and present or not present in the United States.9

Subject to certain exceptions, the commodities trading safe harbor described above does not apply to dealers in commodities.

The JCT Report, as with the mark-to-market account rules, finds the application of the commodities trade safe-harbor to be “uncertain” with respect to digital assets.10 In the view of the JCT, the uncertainty arises because the IRS has not definitively determined whether cryptocurrencies should be commodities or securities. If the question is whether it’s one or the other, this issue is close to irrelevant, as the trading safe-harbor applies to both commodities and securities. It is only in the highly unlikely event that digital assets are not classified as either that this issue matters. The JCT Report, after noting that both Bitcoin and Ether futures are traded on the Chicago Mercantile Exchange (the “CME”) ventures to state that those futures contracts might be treated as commodities for purposes of the trading safe-harbor, even though it has found such trading to be determinative of commodity status in other cases.

C. Loans of Digital Assets

Code § 1058 provides that no gain or loss is recognized on a securities loan if the terms of the securities loan meets four statutory requirements: (1) the agreement requires the return of identical securities; (2) amounts equal to all payments made on the securities during the loan term are paid by the borrower to the lender; (3) the securities loan does not shift the risk of loss or opportunity for gain from the lender to the borrower; and (4) the agreement meets IRS specifications.11 It’s fairly clear that Code § 1058 should not apply to loans of digital assets because digital assets generally are not treated as securities. Again, the JCT Report finds that the law governing the lending of assets other than securities (which would not be governed by Code § 1058) “might provide some relief [from gain recognition] for those lending digital assets,” but the law is “unclear” as to whether gain or loss should be recognized on digital asset loans.

D. Wash Sales

In general, if a taxpayer sustains a loss on the disposition of stock or securities and within the period beginning 30 days before such disposition and ending 30 days after such disposition (this 61-day period is referred to the “wash sale period” or the “61-day period”), the taxpayer acquires “substantially identical stock or securities,” or enters into a contract or option to acquire substantially identical stock or securities, the taxpayer may not claim the loss sustained on the sale or other disposition.12 Code § 1091(e)provides that rules similar to the rules for long positions apply when a taxpayer sustains a loss on a short position and then enters into another short position within the wash sale period. If a taxpayer closes a position in stock or securities at a loss, and Code §1091(a) denies the ability to claim such loss because the taxpayer entered into a transaction within the wash sale period, the taxpayer adds the disallowed loss to its basis in the transaction that gave rise to the wash sale.13

The wash sale discussion in the JCT Report is the first discussion to reach a discussion as to the application of current law to digital assets. This section definitively (if begrudgingly) provides that digital assets are not within the ambit of the wash sale rules. This conclusion should provide comfort to taxpayers who sold digital assets at a loss during the “crypto winter” of 2022 but who re-established such positions within the wash sale period.

E. Constructive Sales

By 1997, Congress had become concerned that certain transactions, including the use of the short against the box and its synthetic equivalents—such as total return equity swaps and forward contracts—to economically dispose of already-owned stock, “did not result in the recognition of gain by the taxpayer.”14 In response to a number of well-publicized transactions in which taxpayers made use of such hedging techniques to monetize equity positions without requiring current taxation, Congress added Section 1259 (commonly referred to as the “constructive sale rules”) to the Code. In general, Code § 1259 requires that a taxpayer recognize gain, but not loss, upon entering into a “constructive sale” of an “appreciated financial position” in an amount equal to the amount of gain that would have been recognized if the position had been sold, assigned, or otherwise terminated at its fair market value on the date of the constructive sale. An “appreciated financial position” is defined as any position with respect to stock, certain debt instruments, or partnership interests if there would be gain if the position were sold, assigned or otherwise terminated at its fair market value.15

Code § 1259(c) provides that a constructive sale of an appreciated financial position takes place, inter alia, if the taxpayer enters into a short sale of the same or substantially identical property, a futures or forward contract to deliver the same or substantially identical property, or an offsetting notional principal contract. For purposes of the constructive sale rules, a forward contract results in a constructive sale of an appreciated financial position only if the forward contract provides for delivery of a substantially fixed amount of property for a substantially fixed price.16 Although the statute does not offer any guidance with respect to what constitutes a “substantially fixed amount of property,” the Senate Finance Committee Report accompanying the constructive sale rules provides that a forward contract that provides for “significant” variation in the amount of property to be delivered does not result in a constructive sale.17

The constructive sale discussion in the JCT Report contains good news for digital asset investors. The JCT Report explicitly acknowledges that digital assets “are not expressly within the scope of section 1259.” Accordingly, this acknowledgement should allow digital asset investors to defease risk on appreciated digital asset positions without triggering any unrealized gain inherent in such assets.

F. De Minimis Foreign Exchange Gain

Code § 988(e)(2) exempts up to $200 per year of gain recognized from the disposition of foreign currency, provided that the foreign currency was not held in connection with a trade or business or held for the production of income. The JCT Report states that, since digital assets are not treated as currency for purposes of the Code, the $200 exemption does not apply to dispositions of cryptocurrencies.

G. Staking

Broadly speaking, there are two types of staking: proof of work and proof of stake. Proof of work occurs when a cryptocurrency miner releases a previously-unreleased cryptocurrency coin by running the correct computer protocols and freeing that coin. This activity is most commonly known as mining. Proof of stake occurs when a person successfully records and validates a transfer of an existing digital asset on a blockchain. In this latter case, the person undertaking the recording is awarded by receiving a small amount of cryptocurrency. The IRS has held both activities result in immediate income equal to the value of the digital assets received in the transactions.18 A taxpayer challenged the IRS on the conclusion that mining bitcoin results in immediate tax, but the IRS conceded the litigation and the matter is still unresolved.19

Many tax practitioners have an issue with the IRS position on proof of work. In the same manner that a gold miner does not recognize income until it sells the gold that it has mined, a cryptocurrency miner should not have income until it disposes of the mined cryptocurrency. The JCT Report, however, follows the IRS position on proof of work mining, continuing to state that a miner recognizes income when a coin is mined. The IRS and the JCT Report both conclude that compensation for proof of stake transactions constitutes ordinary income from the performance of services. This latter conclusion should not be considered controversial.

H. Charitable Contributions

In January 2023, the IRS took the position that an appraisal of digital assets contributed to a charity is required in order to sustain such deduction because, in its view, cryptocurrencies are not readily valued assets (i.e., assets for which an observable market price exists).20 The IRS further stated that a taxpayer could not use the value reported by a cryptocurrency exchange for determining the amount of the charitable contribution and, as a result, disallowed any deduction for the contribution. The JCT recites these facts without taking any position as to whether this result is reasonable or correct or should be modified.

I. FBAR and FATCA Reporting

The foreign bank account reporting (“FBAR”) rules require US persons who maintain bank accounts with assets exceeding $50,000 outside of the United States to disclose the existence of such accounts and information about the accounts to the IRS.21 Although the Bank Secrecy Act was recently amended to add digital asset accounts to the definition of accounts subject to reporting, these rules have not yet been implemented. The Foreign Account Tax Compliance Act (“FATCA”) rules require certain non-US entities to disclose their US owners, classify themselves for tax reporting purposes, and provide reports on the US owners. The JCT Report notes that FATCA does not address digital asset accounts without making any recommendations or other observations.

II. The Lummis-Gillibrand Responsible Financial Innovation Act

The focus of the Lummis-Gillibrand Responsible Financial Innovation Act (the “RFIA”) is on preventing debacles like the one that occurred with respect to the TerraUSD and Luna stablecoins. As our readers no doubt recall, TerraUSD sought to maintain its one dollar trading price by allowing holders to buy and sell Luna coins for a set price of one dollar (which were always supposed to worth one dollar), thereby creating a demand for the two coins that would ensure a stable value for the TerraUSA coin. Both coins collapsed in price and holders lost billions of dollars. The RFIA would severely limit that strategy prospectively by limiting issuers of such coins to financial institutions.

There are not many significant US federal income tax provisions in the proposed legislation. One potentially significant provision is a rule that may generally override the consolidated return regulations for financial institutions acting as digital assets depositories. Section 15(c) of the RFIA provides that a banking regulator may require such a financial institution to execute a tax allocation agreement (“TAA”) with the depository. The TAA would expressly state that an agency relationship exists between the holding company and the depository with respect to undefined “tax assets” generated by the depository. The holding company would be required to hold tax assets (tax payments and refunds) in trust for the depository and make payments to the depository on terms “no less favorable than if the [depository] were a separate taxpayer."

III. Takeaways

To paraphrase Sun Tzu, “The wheels of tax grind slow but grind fine.” Congressional recognition of the US federal income tax uncertainties facing digital asset market participants is a first step in resolving such uncertainties. Hopefully, the issues identified by the JCT Report will be addressed by Congress and/or, to the extent possible, the IRS in the near future. We’ll certainly keep an ear to the ground.


Mark Leeds is a Tax Partner with the New York office of Mayer Brown LLP, an international law firm. Mark’s legal practice includes advising participants in the cryptocurrency markets as to the US federal income tax aspects of various cryptocurrency and digital asset trading strategies. Mark will be presenting on the issues covered in this White Paper at the Beryl Elites 5th Annual Alternative Investment Conference in New York on November 6, 2023. 



1 Staff of the Joint Committee on Taxation, Selected Issues Regarding the Taxation of Digital Assets (June 2023)

2 See the Lummis-Gillibrand Responsible Financial Innovation Act (July 12, 2023)

3 All “Code §” references are the Internal Revenue Code of 1986, as amended.

4 The IRS has taken the position that, for federal income tax purposes, cryptocurrencies are items of property, not currency. Notice 2014-21, 2014-16 I.R.B. 938, as modified by Notice 2023-34

5 Code § 475(e)(2)(A)

6 See U.S Securities and Exchange Commission Press Release, SEC Charges Coinbase for Operating as Unregistered Securities Exchange, Broker and Clearing Agent (Release 2023-102; June 6, 2023)

7 King v. Comm’r, 89 T.C. 445, 459 (1987); Chen v. Comm’r, T.C. Memo 2004-132; Mayer v. Comm’r, T.C. Memo 1994-209; Frick v. Comm’r, T.C. Memo 1985-542, citing Groetzinger v. Comm’r, 82 T.C. 793 (1984), aff’d 771 F.2d 269 (7th Cir. 1985); Miller v. Comm’r, 721 F.2d 810, 813 (Fed. Cir. 1983)

8 Staff of the Joint Committee on Taxation, Present Law and Background Related to US Activities of Foreign Persons, JCX-37-11 (June 22, 2011)

9 Treas. Reg. § 1.864-2(d)(2)(i).

10 The case that the trading safe-harbor does cover cryptocurrencies has been thoughtfully made in by the Managed Funds Association (the “MFA”). See MFA letter to the IRS, Notice 2022-21 Public Recommendations Invited on Items to be Included on the 2022-2023 Priority Guidance Plan (June 3, 2022)

11 We’ve previously considered the application of this body of law to cryptocurrency lending transactions in the context of the Celsius bankruptcy. See https://www.mayerbrown.com/en/perspectives-events/publications/2023/04/celsius-bankruptcy-decision-provides-cryptocurrency-loss-harvesting-opportunity.

12 Code § 1091(a); Treas. Reg. § 1.1091-1(a)

13 Code § 1091(d); Treas. Reg. §1.1091-2(a)

14 See Joint Committee on Taxation, General Explanation of Tax Legislation Enacted in 1997, p. 173 (December 17, 1997)

15 Code § 1259(b)(1).

16 Code § 1259(d)(1).

17 S. Fin. Rep. No. 105-33, 105th Cong., 1st Sess. 125-6 (1997)

18 Notice 2013-21, Q-8 (mining); Notice 2014-21 Q-3 (validating a transfer)

19 Jarrett v. United States, No.3:21-ev-00419 (M.D. Tenn. 2020)

20 G.C.M. 202302012 (Jan. 10, 2023)

21 Code § 6038D

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