- Senator Cynthia Lummis has been working on the Responsible Financial Innovation Act since last year.
- It touches upon taxation and securities rules as they relate to cryptocurrency.
Decrypt’s Art, Fashion, and Entertainment Hub.
A new bill from Senator Cynthia Lummis (R-WY) seeks to overhaul how cryptocurrency can be taxed within the U.S.
Lummis' state policy director, Tyler Lindholm, told The Decrypt Daily podcast that the Responsible Financial Innovation Act, which is still being drafted, will provide clarity to the industry and users. One of its biggest aims is to provide guidance about capital gains related to crypto mining, staking, and spending. "What we're really looking at there is just integrating digital assets into the system of taxation," he said.
Capital gains represent the increase in value from when you purchased an asset to when you sold it. Conversely, capital losses represent a decrease in value. The U.S. taxes net gains on assets such as crypto.
The problem that many people unwittingly face, however, is that a whole slew of common instances are, in fact, taxable events. For starters, paying for something in Bitcoin or another coin equates to selling it in Uncle Sam's eyes. So if you bought a Bitcoin when the coin was at $20,000, then purchased a Tesla with the BTC while it was at $35,000, you're going to be hit with capital gains taxes on that $15,000 difference.
The bill would do several things on this count.
First, it would provide a tax exclusion of up to $600 so crypto users wouldn't be hit with a tax bill for buying the proverbial coffee. While Lummis would prefer it to be higher, according to Lindholm the exact amount could actually end up being lower; the senator is looking for a bill that can pass the Senate.
Second, the bill would clarify that capital gains don't apply to "productive" activities such as mining or staking because you're not getting rid of the asset. Mining refers to using computing power to help secure a blockchain network and potentially earn crypto as a reward. Staking refers to dedicating your crypto to a network to increase security and earn passive income.
"The current gray area is that you might be accruing a capital gains taxable event under proof of stake as it stands right now, even if you're just delegating," said Lindholm.
This isn't theoretical. Internal Revenue Service guidance on this issue doesn't mention staking, but does state that Bitcoin and other proof-of-work cryptocurrencies are taxable as income the day they are mined. A Tennessee couple who were taxed for Tezos staking rewards have sued the IRS in federal court over the matter.
The bill would also allow people to exit retirement schemes such as 401(k)s and IRAs and reinvest the money into cryptocurrency without "fancy footwork" or a big tax bill.
Finally, it seeks to codify Lummis' and Senator Ron Wyden's (D-OR) unsuccessful amendment to the $1 trillion infrastructure bill signed into law last year. According to industry advocates—and Senator Lummis—a provision within that bill which redefined "brokers" to include crypto actors was overly broad; it could be read to require Bitcoin miners and proof-of-stake validators to provide the IRS with tax information of other network users. The Responsible Financial Innovation Act would redefine "broker" to make clear that, while exchanges and custodians are brokers, most other actors aren't.
Senator Lummis has been very friendly to Bitcoin and other cryptocurrencies during her time in the Senate. According to Lummis, she first bought BTC in 2013.
Correction: An earlier version of this article stated that the couple suing the IRS is from Kentucky. The couple is actually from Tennessee.