The Commodity Futures Trading Commission would win jurisdiction over most large digital assets in a wide-ranging, bipartisan package of cryptocurrency legislation introduced Tuesday that would provide a softer treatment of digital assets to the tax code.
Sens. Cynthia Lummis, R-Wyo., and Kirsten Gillibrand, D-N.Y., proposed the measure, saying it would offer certainty and clarity to the growing cryptocurrency and blockchain industries, which welcomed its introduction. Their bill would write definitions related to cryptocurrency trading into law, introduce tax exemptions and create a detailed regulatory framework for digital assets.
The bill would treat cryptocurrency as a commodity and give the CFTC regulatory authority over digital asset spot markets, including bitcoin and ether. Spot means the direct trading of commodities and financial instruments.
“Digital assets, blockchain technology and cryptocurrencies have experienced tremendous growth in the past few years and offer substantial potential benefits if harnessed correctly,” Gillibrand said in a statement. “It is critical that the United States play a leading role in developing policy to regulate new financial products, while also encouraging innovation and protecting consumers.”
In the U.S., there is no overarching and centralized regulatory framework for cryptocurrency, according to a House Financial Services Committee memo from December. Critics have said the federal government’s unfocused approach to digital asset regulation is stifling innovation while others look to clamp down on its criminal use.
Under the legislation, the lawmakers say “ancillary assets” would be commodities. An ancillary asset is an “intangible, fungible asset that is offered, sold, or otherwise provided to a person in connection with the purchase and sale of a security through an arrangement or scheme that constitutes an investment contract,” according to language in the bill. Some exclusions would apply, such as, if someone receives a debt or equity interest with the token they are purchasing, that would then make it a security.
Most digital assets with a higher market cap would be presumed to be a commodity, while those with a lower market cap would be presumed to be securities.
If a digital asset is a commodity, the issuer would have to provide the Securities and Exchange Commission with basic corporate information such as the backgrounds of the board of directors and personnel changes, legal proceedings and risk factors, among other items, on a semi-annual basis. The SEC has not provided feedback on recent versions of the bill.
The bill also outlines requirements for payment stablecoins. Stablecoins are digital tokens whose value is tied to an asset such as the U.S. dollar. The drop in value of some cryptocurrencies in May, including the algorithmic stablecoin Terra, which lost its $1 peg, was followed by dips in other cryptocurrencies including bitcoin and Tether. Treasury Secretary Janet L. Yellen said shortly after Terra’s fall that it underscored the need for legislation to govern stablecoins.
Stablecoins would need to be 100 percent backed by high quality liquid assets and have detailed disclosures on the assets under the Lummis-Gillibrand bill, an effort to protect consumers from risks related to the coins and maintain their value.
The bill also creates an advisory committee made up of industry, federal and state regulators among others to develop guiding principles and advise lawmakers. The bill directs the CFTC and the SEC to study and report on developing a self-regulatory organization for digital asset markets.
Crypto tax code
The Lummis-Gillibrand package would adjust the tax code largely to guarantee more leniency for digital assets.
It would soften new tax reporting mandates created last year, allow an exemption from gross income for gains of up to $200 on cryptocurrency used to buy goods or services, and defer initial tax on digital coins earned from mining or staking until they’re sold.
The Biden administration has emphasized a need for more reporting on cryptocurrency transactions so it can crack down on individuals failing to pay taxes they owe on digital assets. The cryptocurrency industry has balked at some of the efforts and found allies in Congress who are aiming to loosen early rules and provide additional clarity.
Lummis has championed the issue before, joining a bipartisan group of senators who were unsuccessful in getting exemptions written into the new reporting rules laid out in last year’s bipartisan infrastructure law. That group, which also included Finance Chair Ron Wyden, D-Ore., wanted to make sure the mandates didn’t reach certain industry players they argued might not even have the information the IRS required, but ran into resistance from the Treasury Department.
The Lummis-Gillibrand measure would change the reporting mandate to apply to anyone who “stands ready in the ordinary course of a trade or business to affect sales of digital assets at the direction of their customers,” rather than all who are “responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person.” It would delay the requirements to 2025 from their onset in 2023 under current law.
Under current law, the transfer of an asset from a broker to an account not known to be a broker would also trigger tax forms. The Lummis-Gillibrand measure would specify that disclosure would only have to include information customers voluntarily provided and held for legitimate business purposes.
The changes are identical to those included in a bipartisan House bill, according to a summary from Lummis’ office.
Among other tax changes, the bill would classify community-led decentralized autonomous organizations as business entities that must be incorporated as a corporation, limited liability company, foundation or other structure beginning in 2023; require the IRS to provide more guidance on issues including merchant acceptance of cryptocurrency and charitable contributions made in digital currencies; and require a government analysis of the risks and opportunities related to retirement investing in digital assets.
Neither Lummis nor Gillibrand sit on the tax-writing Finance panel, but Wyden has shown interest in supporting the industry’s growth. The House has seen a series of recent crypto-related proposals including from the chamber’s nearly 40-member Blockchain Caucus.
Industry groups that have lobbied Congress on crypto regulation, including the Blockchain Association and Digital Chamber of Commerce, hailed the proposal in comments provided by Lummis’ office. The Digital Chamber of Commerce called the bill a “foundational, comprehensive start to setting a national regulatory framework for digital assets.”