Every crypto lawyer should be thinking about and socializing what the top legislative asks of their practice would be from the incoming Trump administration. Here are some US tax asks. I am open to hearing others. (Originally published as a Twitter thread.)
KILL DEFI & NFT BROKER REPORTING. Congress should amend section 6045 of the tax code to clarify that crypto brokers include only brokers in the traditional sense, not front ends, relayers, and other participants in the decentralized tech stack.
This is top priority. Treasury indicated regs would drop this year on treating noncustodians as crypto tax brokers with impracticable 1099 requirements. For further reading, I assisted DeFi Education Fund in commenting on Treasury's original proposal: https://www.defieducationfund.org/_files/ugd/e53159_40d4255857d142f2a1744be79f1dab3f.pdf
KILL SECTION 6050I. Section 6050I requires anyone who earns more than $10,000 in digital assets in a trade or business during the tax year to report identifying info about the payer and the transaction.
Congress should eliminate the requirement before Treasury issues regs on it. Requiring American entrepreneurs to determine the identity of their payers within a pseudonymous payment system could reduce their access to that system.
For further reading, here's another paper I worked on with DeFi Education Fund: https://www.defieducationfund.org/_files/ugd/84ba66_94bb62e0bac1428585c944bc06884bd2.pdf
ELECTIVE MARK-TO-MARKET FOR CRYPTO INVESTORS. Commodities traders/dealers can mark them to market under section 475 and pay tax at ordinary rates on the annual appreciation (or depreciation).
Congress should extend the 475 election to investors in actively traded crypto. There is significant lack of clarity around the tax treatment of many crypto transactions. Congress has determined that MTM provides "a clear reflection of income" for actively traded property. MTM could give DeFi degens more certainty over their tax treatment.
EXTEND SECTION 864(B)(2) TO CRYPTO. Section 864(b)(2) generally exempts non-US investors from US tax on gains from trading stocks, securities, and commodities through a US investment manager. Congress should extend the exemption to actively traded crypto. Failure to do so makes it very difficult for US investment managers, including hedge fund managers, to trade on behalf of non-US clients.
NO TAX ON CONSENSUS-LAYER MINING OR STAKING. The tax law has never taxed the first owner of property until they sell it, yet the IRS believes validators are taxed at the ordinary rates on newly minted tokens credited to them. Congress should clarify they are not.
Previous legislative proposals (Lummis-Gillibrand) would also have exempted txn fees paid to validators from tax until sale. Though less defensible, that might be appropriate for administrative ease.
For further reading on this, see the second DEF article I linked above.
LIMIT DEEMED ENTITIES. Congress should clarify that crypto tokens are not treated as equity in a tax entity, or otherwise "looked through," unless their ownership confers contractual rights establishing an entity under traditional tax principles (e.g., tokenized stock).
The tax code doesn't clearly define "entity," and many tax lawyers, incl me, are concerned that liquidity pools, liquid staking protocols, governance modules, and similar arrangements could give rise to a deemed tax entity, with surprising and unadministrable consequences. The tax rules for entities (corps and partnerships) and their members assume the existence of a centralized person who can pay and withhold taxes, file tax returns, and report information. The rules are inappropriate for purely onchain arrangements.
PERSONAL EXEMPTION. Section 988(e)(2) lets US taxpayers consume goods and services abroad or make foreign currency payments in small personal txns without being taxed on any resulting gain. Congress should similarly enact an exemption for personal crypto txns.
The details of the exemption need to be considered. It might be difficult to know what a "personal txn" is in crypto. For example, is buying digital art a personal txn or an investment? Application to in-game airdrops or staking also needs to be considered.
NO APPLICATION OF WASH SALE RULES. The wash sale rules of section 1091 limit the ability of taxpayers to claim a loss on a sale of stock or bonds if they acquire substantially identical property within 30 days.
Congress should not extend the wash sale rules to crypto. The wash sale rules were intended to address tax-motivated txns. By contrast, taxpayers who make payments in crypto often acquire new crypto within 30 days for valid nontax reasons. That's similar to commodities users, to whom the wash sale rules also don't apply.
EXTEND SECTION 1058 TO CRYPTO. Congress should modify section 1058 to clarify that crypto "loans" (whether OTC or through a DeFi platform) are nontaxable. Currently, section 1058 applies only to stocks and bonds.
For more on this, see the second DEF letter linked above.
ALLOW EXPENSING OF SOFTWARE DEVELOPMENT. Currently, section 174 generally requires "any amount paid or incurred in connection with the development of any software" to be amortized over 5 years instead of deducted immediately.
Congress should eliminate that requirement. This ask goes beyond the crypto community and is extremely important to all technology entrepreneurs. Section 174 prevents them from being able to deduct compensation paid to their software developers except over 5 years.
CONCLUSION. It's time to stop complaining and put pen to paper. I hope this thread will spark some discussion of tax asks I might have missed while encouraging nontax crypto lawyers to do something similar within their areas of expertise.
