Crypto Tax Bills; Chokepoint

Good morning. With both chambers in recess, this week, we focus on two recently introduced crypto tax bills and two enforcement updates.

• Rep. Gary Palmer (R-AL) introduced a resolution to rescind Treasury's final rule establishing tax reporting requirements for certain custodial digital asset brokers.

• Senator Ted Budd (R-NC) introduced a bill to create a de minimis tax exemption for small, personal cryptocurrency transactions.

• The Federal Reserve Bank of Philadelphia will require Customers Bank to bolster its risk-management and illicit finance programs, after the Fed identified “significant deficiencies” and flagged concerns with the bank's “digital asset strategy.”

• Judge Torres issued a final judgment in SEC v. Ripple, enjoining Ripple from further violations of securities laws and imposing a civil penalty of $125 million.

CRA Resolution

On Friday, August 2, Rep. Gary Palmer (R-AL) introduced H.J. Res. 198, a resolution to repeal Treasury’s “Final Rule” relating to digital asset broker reporting requirements.

• ​Text.

Under the Congressional Review Act, Congress can nullify agency rules through a joint resolution of disapproval. The measure would need to pass the House and Senate by a simple majority vote and garner President Biden’s signature, which is unlikely this Congress.

The bill has been referred to the House Ways & Means committee. As of writing, it has zero cosponsors.

The Final Rule

In July, Treasury published the Final Rule relating to tax reporting requirements for certain digital asset brokers.

• ​Final Rule Text (89 Fed. Reg. 56480).

• Officially titled: “Gross Proceeds and Basis Reporting by Brokers and Determination of Amount Realized and Basis for Digital Asset Transactions.”

The Final Rule provides information reporting requirements for “custodial digital asset brokers.”

• Custodial digital asset brokers include brokers who take possession of their customers' digital assets, and include centralized trading platforms, hosted wallet providers, digital asset kiosks, and certain processors of digital asset payments.

The IRS plans to issue reporting requirements for “non-custodial digital asset brokers” at a later date.

• Non-custodial digital asset brokers do not take possession of customers' assets and include decentralized exchanges and unhosted wallet providers.

While the originally proposed rule would have applied to custodial and non-custodial brokers, the IRS stated in a press release accompanying the Final Rule that the agency and Treasury needed “more time to consider the nuances of transactions involving non-custodial and decentralized brokers.”

Reporting Requirements & Effective Dates

Custodial brokers will have to report information on customers’ digital asset sales or exchanges that occur on or after January 1, 2025.

Information to be reported to the IRS and customers will include:

• Name, address, and taxpayer ID number

• Name and number of units of the digital asset sold

• Sale date

• Gross proceeds amount

• Whether the sale was for cash stored-value cards, or in exchange for services or other property, and more. See PDF pg. 83 for more detailed list.

More specific reporting requirements will be published in a yet-to-be finalized Form 1099-DA.

Custodial digital asset brokers will also have to report cost basis for certain digital asset sales and exchanges that occur on or after January 1, 2026.

Reportable Digital Asset Transactions

Digital assets are defined as “any digital representation of value that is recorded on a cryptographically secured distributed ledger (or any similar technology)” without regard to whether the transaction is actually recorded on a ledger. § 1.6045-1(a)(19).

Digital assets include cryptocurrencies, stablecoins, NFTs, and certain tokenized assets.

However, the Final Rule allows for a de minimis reporting threshold of $10,000 for transactions involving certain qualifying stablecoins, and a $600 de minimis threshold for transactions involving certain NFTs. See PDF pgs. 25-29.

Further, Notice 2024-57, issued alongside the Final Rule, provides that brokers do not have to report information for the following transactions under Section 6045:

• Wrapping and unwrapping transactions

• Liquidity provider transactions

• Staking transactions

• Lending of digital assets

• Short sales of digital assets

• Notional principal contract transactions.

But note: Notice 2024-57 also states that the guidance does not address the substantive tax treatment of the above transactions, nor does it create an inference that they do not have to be reported under another provision of the tax code. See Notice at 4-5.

What’s Next?

Keeping an eye out for the IRS to finalize rules for non-custodial digital asset brokers and a 1099-DA form.

On July 25th, Senators Ted Budd (R-NC), Kyrsten Sinema (I-AZ), Cynthia Lummis (R-WY), and Kirsten Gillibrand (D-NY) introduced the Virtual Currency Tax Fairness Act.

• ​Text.

The bill would exempt from gross income gains or losses that come from the sale or exchange of virtual currencies in certain small, personal transactions. See § 2.

Specifically, gross income would not include gains or losses from personal virtual currency transactions in which:

• the total value of the sale or exchange is $200 or less, or

• the total gain or loss arising from the sale or exchange is $200 or less. Id.

The $200 threshold would be adjusted annually for inflation.

The exemption would not apply if the transaction involves:

• Cash or cash equivalents,

• Property used in a trade or business, or

• Property held for income production. Id.

What's Next?

The bill has been referred to the Senate Finance Committee, where its future prospects remain uncertain.

​Here's a blog post (snip below) by Coin Center's Landon Zinda explaining the bill's potential impact on cryptocurrency users.

Democratic National Convention

• Monday August 19 - Thursday, August 22.

Enforcement

Federal Reserve Bank of Philadelphia v. Customers Bank

• Yesterday, the Federal Reserve Bank of Philadelphia executed an enforcement action against Customers Bank.

• Per the Written Agreement, Customers Bank must develop, implement, and get Fed approval for, improved risk-management and illicit finance programs, after the Fed identified “significant deficiencies.”

  • The Written Agreement homes in on Fed concerns with Customers Bank's “digital asset strategy” (offering banking services to digital asset customers) and “dollar token activities” (operating instant payments platform that allows clients to make tokenized payments over a blockchain to other bank clients). See pgs. 1, 3-4, 9-10.

  • For example, Customers Bank will have to provide the Philly Fed with 30 days written notice prior to engaging in:

    • (1) any new strategic initiative, product, service, or relationship related to a digital asset strategy; or

    • (2) the creation, testing, or launching of a new intra- or interbank instant payments platform or network other than the existing Customers Bank Instant Token network. Pgs. 9-10.

SEC v. Ripple

• Judge Analisa Torres issued a final judgment in SEC v. Ripple, enjoining Ripple from future violations of securities laws and imposing a civil penalty of $125 million dollars.

  • The SEC had sought a civil penalty of $876 million, disgorgement of $876 million and $198 million in prejudgement interest.

  • Ripple sought to pay a civil penalty of $10 million.

  • ​Order.​

CFTC v. FTX

• ​CFTC obtains $12.7 billion judgment against FTX and Alameda.

White House

• “Crypto executives clash with Democratic leaders in heated Zoom meeting” (Eleanor Terrett; Fox Business). Snip from article:

Election 2024

Presidential

• VP Kamala Harris selected Minnesota Governor Tim Walz as her running mate.

• Governor Walz's views on crypto are unknown.

  • Interestingly, he doesn't own any stocks, mutual funds, bonds, or crypto.

  • Axios's Mike Allen & Jim VandeHei floated potential cabinet officials in a Harris administration, suggesting Commerce Secretary Gina Raimondo or Deputy Treasury Secretary Wally Adeyemo could serve as Treasury Secretary.

Congress

• ​Fairshake pledged $25 million to support nine Democrats and nine Republicans running for Congress this November (Liz Napolitano; Decrypt).

Prediction Markets

• Senator Jeff Merkley (D-OR) led a letter to the CFTC urging the agency to finalize a rule to prohibit event contracts concerning the outcome of U.S. elections.

  • Cosigns: Senators Sheldon Whitehouse (D-RI), Elizabeth Warren (D-MA), Chris Van Hollen (D-MD), Richard Blumenthal (D-CT); Reps. Jamie Raskin (D-MD), John Sarbanes (D-MD), Eleanor Holmes Norton (D-DC),

  • ​Letter.

  • ​CFTC's Proposed Rule (Comment period closed on August 8, 2024).

Op-Ed

• “Blockchains Against Corruption:” Paul Brody, head of blockchain at EY, pens Op-Ed in CoinDesk, arguing decentralized tech can address unforeseen macro threats from currency risks to judicial risks.

Last Week's A: Former Senators Wendell Anderson (D-MN) (Hockey), Bill Bradley (D-NJ) (Basketball), and Ben Campbell (D, R-CO) (Judo) all participated in the Olympic games.

This Week's Q: Which U.S. President signed into law the Federal Reserve Act, creating the Federal Reserve System?

Thanks for reading and have a great weekend!

-GSL