‘Bitcoin Senator’ Lummis Bill Would Change Capital Gains Landscape For Crypto

'Bitcoin Senator' Lummis Bill Would Change Capital Gains Landscape For Crypto

In short

  • Senator Cynthia Lummis has been working on the Responsible Financial Innovation Act for the past year.
  • It discusses taxation and securities rules as they relate to cryptocurrency.

A new bill from Senator Cynthia Lummis (R-WY) seeks to overhaul how cryptocurrency can be taxed in the United States

Lummis State Policy Director Tyler Lindholm said The daily decryption podcast that the Responsible Financial Innovation Act, which is still being drafted, will bring clarity to the industry and users. One of its main purposes is to provide advice on capital gains related to crypto mining, staking and spending. “What we’re really looking for there is just bringing digital assets into the taxation system,” he said.

Capital gains represent the increase in value between the time you bought a property and the time you sold it. Conversely, capital losses represent a decrease in value. The United States taxes net gains on assets such as crypto.

The problem that many people unknowingly face, however, is that a whole host of common instances are, in fact, taxable events. For starters, paying for something in bitcoin or another coin is like selling it in the eyes of Uncle Sam. So if you bought a bitcoin when the coin was at $20,000, then bought a Tesla with the BTC when it was $35,000, you’re going to be hit with capital gains tax on that $15,000 difference.

The bill would do several things in this regard.

First, it would provide a tax exclusion of up to $600 so crypto users wouldn’t be hit with a tax bill for buying the proverbial coffee. While Lummis would prefer it to be higher, according to Lindholm, the exact amount might actually be lower; the senator is looking for a bill that can pass the Senate.

Second, the bill would clarify that capital gains do not apply to “productive” activities such as mining or staking because you are not disposing of the asset. Mining refers to the use of computing power to help secure a blockchain network and potentially earn crypto as a reward. Staking is all about dedicating your crypto to a network to increase security and earn passive income.

“The current gray area is that you could accumulate a taxable capital gains event under proof of stake as it currently stands, even if you are only delegating,” Lindholm said.

It’s not theoretical. The Internal Revenue Service guidelines on this issue do not mention staking, but do indicate that Bitcoin and other proof-of-work cryptocurrencies are taxable as income on the day they are mined. A couple from Kentucky, who were taxed for Tezos staking rewards, sued the IRS in federal court on the matter.

The bill would also allow people to exit retirement plans such as 401(k)s and IRAs and reinvest the money in cryptocurrency without “sophisticated footwork” or a big tax bill.

Finally, it seeks to codify the opinion of Lummis and Senator Ron Wyden (D-OR) unsuccessful amendment to the $1 trillion infrastructure bill enacted last year. According to industry advocates – and Senator Lummis – a provision in that bill that redefine “brokers” to include crypto players was too broad; it could be interpreted as requiring bitcoin miners and proof-of-stake validators to provide the tax information of other network users to the IRS. The Responsible Financial Innovation Act would redefine “broker” to clarify that while exchanges and custodians are brokers, most other players are not.

Senator Lummis has been very friendly with Bitcoin and other cryptocurrencies during her time in the Senate. According to Lummis, she first bought BTC in 2013.

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