On June 7, 2022, a bill was introduced in the US Senate that would provide more clarity regarding the taxation and regulation of digital assets. Here are some highlights.

Definitions

The bill would provide definitions relating to digital assets that would be generally applicable in areas of law such as federal income tax, commodity regulation, and securities regulation. The terms that the bill would define would include the following:

• A “digital asset” would be defined as a “native electronic asset that . . . confers economic, ownership, or access rights or power . . . and . . . is recorded using high-end technology. cryptographically secured distributed book.[1]
• “Distributed ledger technology” would mean “technology that enables the operation and use of a ledger that . . . is shared across a set of distributed nodes that participate in a network and store a full or partial replica of the ledger; . . . is synchronized between nodes; [and] . . . has data added to the ledger by following the ledger’s specified consensus mechanism. . . .”[2]
• “Smart contract” would mean “computer code deployed on a distributed ledger technology network that executes an instruction based on the occurrence or non-occurrence of specified conditions . . . or any similar analog . . . and . . . may include taking possession of a digital asset and transferring the asset or issuing executable instructions for those actions.”[3]
• “Virtual currency” would be defined as “a digital asset that . . . is used primarily as a medium of exchange, unit of account, store of value, or any combination thereof; . . . which is not legal tender. . .; and . . . does not derive value from or is backed by an underlying financial asset. . . .”[4]

Taxation of mining and staking activities

Under the bill, income related to mining and staking activities would be deferred until the tax year in which there was a disposition (i.e. a sale or an exchange) of the assets produced or received in the course of these activities.[5] Thus, the bill would effectively reverse the Internal Revenue Service (IRS) guidance in Notice 2014-16 that a taxpayer must include the fair market value of virtual currency received from mining activities in gross income at the date of receipt. For more information on current IRS guidelines, see our article here.

Exclusion for personal transactions

The bill would exclude from gross income the first $200 (adjusted for inflation) of gain or loss resulting from the disposition of virtual currency in a personal transaction for the purchase of goods or services other than dispositions in which virtual currency is sold or exchanged for cash. , cash equivalents, digital assets or other securities or commodities.[6] The IRS would also be required to issue regulations regarding feedback on virtual currency transactions.[7]

Income actually connected

The bill would provide that trading in digital assets on a taxpayer’s own account or through a resident broker, commission agent, custodian or digital asset agent would not would not constitute a trade or business for the purposes of determining whether the income actually relates to a trade or business. in the USA.[8] Determining whether the income is actually connected with a trade or business in the United States is primarily relevant to determining the federal income tax treatment relating to specific items of income of foreign persons.[9]

Decentralized Autonomous Organizations (DAO)

The bill would define a “decentralized autonomous organization” as “an organization . . . that uses smart contracts. . . to carry out a collective action for the benefit of a company, a trade, a charitable or similar association, . . .whose governance is essentially distributed, and . . . which is duly incorporated or organized under the laws of any state or foreign jurisdiction as a decentralized self-governing organization, cooperative, foundation or any similar entity”.[10] The bill would provide that the default classification of a DAO would be as a business entity that is not an ignored entity and that mining and staking digital assets and raising funds for charitable purposes would not be not considered a business activity of a DAO for the purposes of determining whether the DAO is a social club under Section 501(c)(7) of the Internal Revenue Code.[11]

raw materials c. Securities

The bill would ensure that certain investment contracts under which an ancillary asset is provided by the issuer would be presumed to be a commodity subject to the Commodity Exchange Act rather than a security subject to the Securities Act of 1933 or the Securities Exchange Act of 1934.[12]

For these purposes, an “ancillary asset” would be defined as “an intangible, fungible asset that is offered, sold, or otherwise provided to a person in relation . . . an investment contract. . . .”[13] However, an ancillary asset would not include a debt or equity interest in a business entity, trading rights with respect to that entity, a right to payment of interest or dividends from that entity, a share in the profits or income in that entity derived solely from the business or management efforts of others, or any other financial interest in that entity.[14]

The bill would also expand the jurisdiction of the Commodity Futures Trading Commission to cover digital asset transactions other than those involving “digital collectibles and other unique digital assets.”[15] Additionally, the bill would require the registration and regulation of certain “digital asset exchanges.”[16]

Stable Coins

The bill would allow a depository institution to issue, redeem, and conduct all ancillary activities related to payment stablecoins, as long as the institution maintains high-quality liquid assets equal to at least 100% of the amount. nominal value of the payment stablecoins issued by the institution. .[17]

Qualifying “high quality liquid assets” would mean 1) legal tender in the United States, 2) demand deposits with a depository institution, 3) balances held with a Federal Reserve Bank, 4) foreign deposits redeemable securities compatible with any foreign unit of account to which a stablecoin payment is pegged, 5) a security issued or unguaranteed by the Department of the Treasury with an original maturity date not exceeding one year (or a relative reserve redemption agreement in such capacity), and 7) any other high-quality liquid asset security that the appropriate federal banking agency or state banking supervisor deems consistent with safe and sound banking practices.[18]

The depository institution would be required to publicly disclose a description of the assets backing the payment stablecoins.[19] A depository institution would also be required to obtain authorization from the appropriate federal banking agency or state bank supervisor before issuing the stablecoin payment.[20]

[1] Lummis-Gillibrand Responsible Financial Innovation Act, S. 4356, 117th Cong. § 101 (2022) (hereinafter “RFI”) (Proposed 31 USC § 9801(2)). Although the text of the bill has yet to be added to the Congress website, a copy can be found here.

[2] Identifier. (Proposed 31 USC § 9801(4)).

[3] Identifier. (Proposed 31 USC § 9801(8)).

[4] Identifier. (Proposed 31 USC § 9801(10)).

[5] RFIA, above note 1, § 208 (adding 26 USC § 451(l)).

[6] Identifier. second. 201(a) (proposed 26 USC § 139J).

[7] Identifier. second. 201(c).

[8] Identifier. second. 203(a) (amending 26 USC § 864(b)(2), which provides a safe harbor for certain securities and commodities trading activities in the United States by foreign persons).

[9] See 26 USC §§ 871, 881, 882.

[10] RFIA § 204(a) (adding 26 USC § 7701(a)(51)).

[11] Identifier. § 204(a).

[12] Identifier. § 301 (adding 15 USC § 41(b)(4)).

[13] Identifier. § 301 (adding 15 USC § 41(a)).

[14] Identifier.

[15] Identifier. §§ 401-403.

[16] Identifier. § 404 (adding 7 USC 5i). For these purposes, a “digital asset exchange” would mean “a trading facility that lists for trading at least 1 digital asset”. Identifier. § 401 (7 USC § 1a(15B).

[17] RFIA § 601 (adding 12 USC § 4810(a), (b)). A “depository institution” would be defined by reference to Section 19(b)(1) of the Federal Reserve Act (12 USC § 461(b)(1)). Identifier. (by adding 12 USC § 4810(m)). A “payout stablecoin” would mean a digital asset redeemable on demand on an individual basis to be legal tender, issued by a commercial entity, accompanied by a statement from the issuer that the asset is redeemable, backed by a or more financial assets other than digital assets, and intended to be used as a medium of exchange. See id. §§ 101(a) (adding 31 USC § 9801(5), defining “stablecoin payment”, 601 (adding 12 USC § 4810(m)(2), defining “stablecoin payment” by reference to 31 USC § 9801).

[18] RFI sec. 601 (adding 12 USC § 4810(b)).

[19] RFI sec. 601 (adding 12 USC § 4801(c)).

[20] AFR § 601.

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