On 11 July 2023, Chairman Ron Wyden and Ranking Member Mike Crapo of the Senate Committee on Finance penned an open letter to members of the digital asset community and other interested parties requesting assistance in helping Congress understand how to address various tax issues related to the taxation of digital assets ("Senate Finance Letter"). This letter presented a series of questions addressing the tax challenges and opportunities presented by digital assets. These questions were based on a report prepared by the Joint Committee on Taxation in response to an earlier request from the Senate Finance Committee ("JCT Report").
The core issue raised by the JCT Report is the continued uncertainty over the tax characterization of digital assets. For example, the IRS concluded in Notice 2014-21 that "convertible virtual currency" should be treated as property, but not currency, for US federal income tax purposes. But various provisions of the Internal Revenue Code (IRC) afford different tax treatment to different types of property, and there is inadequate guidance on how digital assets should be characterized for purposes of these tax provisions. The JCT Report then identified a number of tax issues posed by digital assets, and the Senate Finance Letter then posed a series of questions related to the issues raised in the JCT Report.
One day after the Senate Finance Letter was published, Senators Cynthia Lummis and Kirsten Gillibrand introduced the Lummis-Gillibrand Responsible Financial Innovation Act (RFIA). The bill, which is a revised version of a 2022 bipartisan bill sharing the same title (see S. 4356, 117th Cong.), is intended to “provide consumer protection and responsible financial innovation, to bring crypto assets within the regulatory perimeter,” and to achieve other related objectives. Sections 801-809 of the RFIA set forth a number of tax legislative proposals, seven of which overlap with the questions posed in the Senate Finance Letter.
What follows is a brief discussion of the issues that were identified in the JCT Report, raised as questions in the Senate Finance Letter, and/or addressed in legislative proposals in the RFIA.
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