August 3, 2023

U.S. Crypto Taxation Takes a Major Turn: What’s at Stake?

By Adnan Islam, Esq., LL.M., EA, MBA, CPA, Partner, Tax & Business Services

U.S. Crypto Taxation Takes a Major Turn: What’s at Stake? Digital Assets & Blockchain

The evolving landscape of crypto taxation in the United States has just undergone significant changes. With a major Senate committee inquiry, a landmark appeals court case, and fresh IRS guidelines, cryptocurrency rules are becoming more precise—but what does this mean for investors, industry players, and the broader economy? This article explores the recent developments reshaping crypto taxation and the potential impact on stakeholders.

On July 11, 2023, the Senate Finance Committee issued a letter, known as the “SFC Letter,” calling for a clearer crypto tax law. The committee’s questions sought feedback on various tax issues, including:

  • Mark-to-Market (MTM) for traders and dealers
  • Trading safe harbor rules
  • Treatment of digital asset loans
  • Wash sales
  • Timing and source of income from staking and mining
  • Reporting requirements for digital asset accounts and transactions

The SFC Letter represents a proactive step toward understanding and regulating the complex world of digital currencies.

A crucial case unfolding in the Sixth Circuit Court of Appeals, Jarrett v. United States, continues to make headlines. In this case, taxpayers are fighting for a favorable tax position on staking rewards, arguing they should only be taxed when sold or otherwise disposed of. The IRS’s counterargument and the ongoing legal battle highlights the ambiguity and challenges of applying traditional tax laws to crypto.

The IRS has issued a new Revenue Ruling, 2023-14, stating that crypto stakers must include the fair market value of their rewards as gross income in the year they gain control over them. This ruling differs from the previous treatment of mined digital assets and represents a significant shift in how crypto income is recognized and taxed.

The recent developments are not only intricate but also leave many questions unanswered. Future tax laws will need to bridge the gap between technological advancements in crypto and the often tedious tax compliance requirements.

The whirlwind of activity in July 2023 has set a new precedent for crypto taxation in the U.S. With more clarity comes greater responsibility for taxpayers, preparers, validators, and issuers to comply with evolving rules. However, many unanswered questions remain, and the struggle for an ideal balance between regulation and innovation continues. The coming months will likely witness further changes, and those involved in the crypto space must remain vigilant and informed. Will the U.S. lead the way in crypto taxation or follow global trends? Only time will tell.

While these highlights offer a snapshot of the changing crypto world, there is much more to explore.

Click here to read the full analysis

If you have any questions about what these developments may mean for you or your business, please get in touch with Marcum’s Digital Currency Tax Team or International Tax Services team.