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April 4, 2022

"Modernization" rules proposed in Treasury Green Book would affect taxpayers holding and transacting with digital assets

The Biden Administration has proposed expanding the scope of tax rules applicable to digital assets in the FY2023 Budget and Treasury Green Book, released on March 28, 2022. The Green Book contains four specific proposals, described as "modernization rules," that apply to digital assets. The proposals would:

  • Extend the nonrecognition rules for securities loans to loans of actively traded digital assets
  • Increase information reporting by certain financial institutions and digital asset brokers for purposes of exchanging information with other jurisdictions
  • Require taxpayers to report foreign digital asset accounts under IRC Section 6038D
  • Amend the mark-to-market rules for dealers and traders to include digital assets

Proposal: Apply securities lending rules to actively traded digital assets

The Green Book would expand the securities lending nonrecognition rules to include loans of "actively traded digital assets recorded on cryptographically secured distributed ledgers." These loans must have terms similar to those currently required for loans of securities.

IRC Section 1058 generally provides nonrecognition treatment when securities are lent by and subsequently returned to the taxpayer if the securities loan meets statutory requirements. For this purpose, the term "securities" currently includes only corporate stock, notes, bonds, debentures and other evidence of indebtedness, and any evidence of an interest in or right to purchase any of the foregoing.

According to the Green Book proposal, "[s]ince these rules are intended to ensure that the taxpayer making the loan of securities remains in an economic and tax position similar to the position it would have been in absent the loan, the rules should be further amended to ensure that taxpayers take income from a loan of an asset into account in a manner comparable to the income the taxpayer would have had if it had continued to hold the asset."

Under the proposal, loans of actively traded digital assets would receive similar treatment whereby no gain or loss would be recognized on the transfer (and subsequent return) of the assets. The Treasury Secretary would have the authority to (1) determine when digital assets are actively traded and (2) extend the nonrecognition rules to non-actively traded digital assets and other assets, such as interests in publicly traded partnerships (PTPs). The proposal would require the lender to take into account the income that the lender would have realized if it had continued to hold the asset, with appropriate basis adjustments when the loaned asset is returned.

The proposal noted that no inference is intended regarding the current law treatment of loans of digital assets or equity interests in PTPs or the treatment of income on loaned securities or fixed-term securities loans.

The proposal would be effective for tax years beginning after December 31, 2022.

Implications: The Green Book proposal represents Treasury's acknowledgement that (1) there is a rapidly growing market for digital asset liquidity, (2) taxpayers need tax guidance on those transactions and (3) certain transactions involving digital assets may be analogous to those described in the securities lending rules of IRC Section 1058. Applying securities lending rules to digital assets would be well received by taxpayers who have long argued for nonrecognition treatment for these transactions. Taxpayers participating in digital asset-lending arrangements should pay close attention to future developments around this proposal. Additional clarity about the status of loans of PTP interests also would be well received in light of the withholding tax on "dispositions" of those interest under IRC Section 1446(f).

Proposal: Expand tax information reporting of foreign persons by US brokers

The Green Book proposes amending the reciprocal information-sharing rules under the Foreign Account Tax Compliance Act (FATCA) regime to bring digital assets within the scope of those rules. The FATCA provisions of the Internal Revenue Code generally require foreign financial institutions to report to the IRS comprehensive information about US accounts. Foreign financial institutions that do not comply with these obligations may be subject to US withholding tax on certain US-source payments. Under FATCA intergovernmental agreements (IGAs) with other countries, the US receives comprehensive data on accounts of US persons in other countries, while the US shares more limited data (essentially derived from Form 1042-S filings on US-source income) with those countries about accounts of their residents in the US.

The proposal would require certain financial institutions to report (1) account balances for all financial accounts maintained at a US office and held by foreign persons, (2) both US- and non-US-source payments to accounts held by foreign persons and (3) gross proceeds from the sale or redemption of property held in, or with respect to, a financial account held by a foreign person. For digital assets held by passive entities, the proposal would require brokers, such as US digital asset exchanges,1 to report information on the substantial foreign owners of those entities. The proposal, if adopted, and combined with existing law, would require a broker to report gross proceeds and certain other information required by Treasury for sales of digital assets to customers, and for certain passive entities, their substantial foreign owners.

According to the Green Book, "[t]his would allow the United States to share such information on an automatic basis with appropriate partner jurisdictions, in order to reciprocally receive information on U.S. taxpayers that directly or through passive entities engage in digital asset transactions outside the United States pursuant to an international automatic exchange of information framework."

The proposal would be effective for returns required to be filed after December 31, 2023.

Implications: IGAs going back to 2014 contain assurances that the US will strive to make information exchange more reciprocal. The expanded information-sharing rules proposed in the Green Book build on the recently enacted Infrastructure Investment and Jobs Act, which broadened the definition of a "broker" to include various participants in the digital asset ecosystem (See Tax Alert 2021-1538). Treasury's proposal is also timely in light of the proposals released by the OECD as a part of a public consultation on its Crypto-Asset Reporting Framework (CARF).

Proposal: Require FATCA reporting for foreign digital asset accounts

The Green Book proposal would expand the scope of the IRS foreign account reporting rules to require reporting of certain accounts that hold digital assets maintained by a foreign digital asset exchange or other foreign digital asset service provider.

IRC Section 6038D requires any individual that holds an interest in one or more specified foreign financial assets with an aggregate value of at least $50,000 during a tax year to attach Form 8938, Statement of Specified Foreign Financial Assets, to the individual's tax return. Treasury regulations under IRC Section 6038D also apply these requirements to domestic entities formed or availed of for purposes of holding specified foreign financial assets. A specified foreign financial asset presently includes two categories: (1) financial accounts maintained by a foreign financial institution, as defined by IRC Section 1471, and (2) certain specified foreign assets not held in a financial account maintained by such a financial institution. Taxpayers can incur significant penalties for neglected or incorrect reporting of such accounts.

The proposal would amend IRC Section 6038D(b) to require reporting for a third category of asset: any account that holds digital assets maintained by a foreign digital asset exchange or other foreign digital asset service provider (a foreign digital asset account). The proposal notes that reporting will only be required if the aggregate value of all three categories of assets held by the taxpayer exceeds $50,000.

The proposal would be effective for returns filed after December 31, 2022.

Implications: Historically, taxpayers have faced uncertainty when determining whether foreign digital asset accounts such as those held on overseas exchanges need to be reported to the IRS. As with the OECD's proposed updates to the CARF framework, the Green Book serves as a reminder that taxpayers should be mindful of their digital asset activities and the various service providers with whom they engage.

Proposal: Amend mark-to-market rules for actively traded digital assets

The Green Book proposal would allow dealers or traders of digital assets to use the mark-to-market method of accounting for actively traded digital assets and their derivatives or hedges.

Under IRC Section 475(a), securities dealers must use the mark-to-market method of accounting for certain noninventory securities, which means the dealer must recognize gain or loss on those securities as if they were sold on the last day of the year. IRC Section 475(c)(2)(C) defines a security to include "any … note, bond, debenture, or other evidence of indebtedness." Securities traders and commodities dealers and traders may also elect to use this mark-to-market method of accounting.

The Green Book proposal would add a third category of assets that may be marked-to-market at the election of a dealer or trader in those assets. This category would consist of actively traded digital assets and derivatives on, or hedges of, those digital assets, under rules similar to those that apply to actively traded commodities. The Treasury Secretary would be authorized to determine which digital assets are treated as actively traded by considering relevant facts and circumstances, such as (1) whether they are regularly bought and sold for a fiat currency, (2) their trading volume on exchanges that have reliable valuations, and (3) reliable price quotations. The proposal also clarifies that "a digital asset would not be treated as a security or commodity for purposes of the mark-to-market rules."

According to the proposal, "[a]llowing taxpayers to mark actively traded digital assets to market would clearly reflect income and could reduce tax compliance burdens, just as current law does for other assets of commodities dealers and securities traders."

The proposal would be effective for tax years beginning after December 31, 2022.

Implications: Taxpayers who previously treated (or currently treat) cryptocurrency as commodities should note Treasury's proposal to define digital assets as neither a security nor a commodity. While the proposal would provide some clarity around applying the mark-to-market rules to certain taxpayers and digital assets, taxpayers qualifying as dealers or traders in digital assets will want to consider the administrative feasibility of tracking activity for such accounting method and the volume of their transactions before adopting the method.


Contact Information
For additional information concerning this Alert, please contact:
Financial Services Office
   • Thomas Shea (
   • Jonathan Jackel (
   • Brian Mistler (
International Tax and Transaction Services – Capital Markets Tax Practice
   • Lee Holt (
   • Matthew Stevens (


1 Section 80603 of the Infrastructure Investment and Jobs Act of 2021 clarifies that a broker includes any person who (for consideration) is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person.