US Senator Introduces New Bill to Overhaul How Cryptocurrencies Are Taxed in the US

A new bill introduced by U.S. Senator Cynthia Lummis (R-WY) aims to overhaul the way cryptocurrencies are taxed in the United States.

State policy director Tyler Lindholm said the Financial Innovation Act, which is still being drafted, will provide clarity to the industry and users. One of its biggest goals is to provide guidance on capital gains associated with crypto mining, staking and spending. "We're really just focused on integrating digital assets into the tax system," he said. Capital gains refer to the appreciation in value from the time an asset is purchased to the time it is sold. Conversely, capital losses represent a decrease in value. The U.S. taxes net gains on assets such as crypto.

The problem many people face, however, is that a whole bunch of common scenarios are actually taxable events. If you bought Bitcoin when it was $20,000, and then used it to buy a Tesla when it was $35,000, you would pay capital gains tax on the $15,000 difference.

The bill would do several things on this point.

First, it will offer up to $600 in tax exemptions, so crypto users won’t receive a tax bill for buying coffee. While Lummis hopes it will be higher, the exact amount may actually end up being lower, according to Lindholm.

Second, the bill would clarify that capital gains do not apply to “productive” activities, such as mining or staking. Mining refers to using computing power to help secure a blockchain network and potentially earn cryptocurrency as a reward. Staking refers to dedicating your cryptocurrency to a network to increase security and earn passive income.

“The grey area right now is that you may accrue a capital gains taxable event under proof of stake even if you are only delegating,” Lindholm said.

The IRS guidance on the subject does not mention staking, but does state that Bitcoin and other proof-of-work cryptocurrencies are taxed as income on the date they are mined. A Kentucky couple who were taxed on Tezos staking rewards have sued the IRS in federal court over the matter.

The bill would also allow people to withdraw from retirement plans, such as 401(k)s and IRAs, and reinvest the funds in cryptocurrencies without a huge tax bill.

Finally, it seeks to codify into law Lummis and Sen. Ron Wyden (D-OR)’s unsuccessful amendments to the $1 trillion infrastructure bill signed last year. Lummis argues that a provision in the bill that redefines “broker” to include crypto participants is too broad; it could be read as requiring Bitcoin miners and proof-of-stake validators to provide the IRS with tax information on other network users. The new bill would redefine “broker” to make it clear that while exchanges and custodians are brokers, most other participants are not.