Last night, I reviewed not-yet-public crypto legislation slated for inclusion in the Trump megabill. The legislation is promising, but requires clarifications in some respects. Here’s a summary thread that includes my observations

MINING AND STAKING. Gross income from “mining or staking activities” would be “deferred” until the year of sale.

It’s crucial that the bill be revised to define “mining or staking activities” and to say how income is characterized in the year of sale.

First, the bill should provide that staking includes both operating a validator (either directly or through an agent) and any activity closely related thereto, to clearly include earning MEV and priority fees.

Second, the bill should provide that gain from sale is ordinary or capital based on traditional tax principles. Without that change, crypto ETPs will have trouble staking. If an ETP’s only income is gain from sales, the ETP can be treated as a partnership. But if its income includes “deferred” ordinary income, it might be taxed as a corporation absent another legislative change.

WITHHOLDING ON FOREIGNERS. The bill would source income from a sale of mining or staking rewards to the residence of the seller, so non-US investors would not be subject to US withholding tax even if they (or the ETP they invest in) stake through a US service provider.

This is a welcome change. However, non-US investors continue to be at risk of being subject to US income tax unless a change is made to the “income tax on foreigners” provisions of the bill discussed immediately below.

INCOME TAX ON FOREIGNERS. Under the bill, US asset managers can trade digital assets for foreigners without causing them to be subject to US income tax.

The bill should provide that “trading” includes staking. Otherwise, US staking providers will continue to have trouble serving foreigners.

The bill seems to create a loophole for tokenized US real estate. Foreigners are subject to US tax on sales of nontokenized US real estate.

UBIT EXCLUSION. Tax-exempt investors would not be subject to unrelated business income tax on “amounts received from the use of digital assets for the purpose of staking.”

For clarity, the bill should replace the quoted language with “staking” (as defined above under “mining and staking”).

$600 DE MINIMIS RULE. The bill would eliminate tax on gain from a disposition of digital assets on any transaction “the total value” of which does not exceed $600, unless the sale is an exchange for cash, stocks, bonds, other crypto, inventory, or similar property.

DIGITAL ASSET LOANS. Loans of digital assets generally would not be taxable to the lender. Under current law, it is not entirely clear whether a loan of digital assets is a taxable disposition for the lender, so this is a helpful clarification.

That said, the legislation doesn’t address the source of crypto “borrow fees.” Thus, there remains a risk that borrow fees paid by a US person to a non-US person are subject to US withholding tax.

AIRDROPS. Airdrops would not be taxed until sold, at which point they are taxed at ordinary rates.

Upfront nontaxation of airdrops is extremely helpful. Not only does it simplify the recipients’ taxes; it also might allow US entities to do airdrops without 1099s.

However, ordinary income on sale creates an incentive for recipients to dump and then buy back. At the very least, the ordinary income tax should apply only up to the value of the token at the time of the airdrop.

The bill also should provide a sourcing rule for airdrops.

MARK-TO-MARKET. Traders and dealers can elect to mark actively traded digital assets to market each year, and pay tax at ordinary rates on any appreciation or depreciation.

I would have liked to see this election made available to investors too. With the treatment of liquidity provision and other common DeFi transactions still uncertain, many retail investors would have welcomed a MTM election. The threshold for “trading” is too high to apply to most retail investors, even those with thousands of transactions.

WASH SALES. The wash sale rules would extend to digital assets. Thus, losses on a sale of crypto generally would be disallowed if the taxpayer buys substantially identical crypto within 30 days of the sale.

The inclusion of this provision is extremely unfortunate. As I’ve previously explained, the wash sale rules are meant to address tax-motivated sales. Applying them broadly to crypto captures taxpayers who, e.g., programmatically buy crypto each month and use it to make purchases.

That said, under reconciliation, tax legislation needs to be scored as revenue-neutral. Expanding the wash sale rules to crypto is intended to pay for the bill’s other goodies.

CRYPTO DONATIONS. US taxpayers generally would not need to obtain a “qualified appraisal” to take a tax deduction on a donation of actively traded crypto. Currently, a qualified appraisal is required for crypto donations in excess of $5000.

WHAT’S MISSING? There are a number of things missing from the bill that I would have liked to see.

(a) Section 6050I should be repealed. That section empowers Treasury to require recipients of $10k of crypto to report the identity of the payers, an impossible ask for anons.

(b) Stablecoins should explicitly be carved out of any information reporting requirements.

(c) The definition of “digital assets” should be revised so that it does not refer to a “digital representation of value,” which technically doesn’t include most crypto.

CONCLUSION. The bill represents an admirable effort to provide some clarity to the taxation of digital assets. It falls flat in a number of key areas, but hopefully industry comments over the next few days will get it in good shape.