31 January 2025 Executive order and SEC's repeal of SAB 121 mark new era for crypto regulation
On January 23, 2025, President Donald Trump signed an EO titled "Strengthening American Leadership in Digital Financial Technology." During his campaign, the President branded himself as a "pro-crypto candidate" and made several promises, including, but not limited to, the creation of a US strategic cryptocurrency reserve. After years of litigation, controversy, bankruptcies and the like, the digital asset community eagerly awaited action by the new Trump administration in hopes of promoting the industry. The January 23 EO stated, "It is therefore the policy of my Administration to support the responsible growth and use of digital assets, blockchain technology, and related technologies across all sectors … "
With those policies and objectives in mind, the January 23 EO revokes EO 14067, signed on March 9, 2022, by former President Biden, and established a "Working Group on Digital Asset Markets." The working group will be chaired by the Special Advisory to the President on AI and Crypto, David Sacks, and include officials or designees from the Secretary of the Treasury, Office of the Attorney General, Secretary of Commerce, SEC and Commodity Futures Trading Commission (CFTC), among others. The working group has been tasked with:
Lastly, the EO prohibits agencies from undertaking any action to establish, issue or promote CBDCs within the US or abroad, and terminates any current actions being undertaken regarding CBDCs before the EO was signed. The EO came alongside the repeal of the SEC's SAB No. 121, which was introduced in March 2022 and required institutions holding Bitcoin and other digital assets for customers to recognize a liability and a related asset measured at the fair value of the customer's. SAB No. 122, which repealed SAB No. 121, will now require custodians to: "[D]etermine whether to recognize a liability related to the risk of loss under such an obligation, and if so, the measurement of such a liability, by applying the recognition and measurement requirements for liabilities arising from contingencies in Financial Accounting Standards Board Accounting Standards Codification ("FASB ASC") Subtopic 450-20, Loss Contingencies, or International Accounting Standard ("IAS") 37, Provisions, Contingent Liabilities and Contingent Assets under U.S. generally accepted accounting principles and IFRS Accounting Standards, respectively."1 See our To the Point for further information on SAB 122. President Trump's EO raises questions around the current digital asset broker reporting regulations published as final by the Treasury Department and the Internal Revenue Service (IRS) in two tranches: regulations for centralized exchanges published on July 9, 2024 (see Tax Alert 2024-1385) and regulations mandating reporting by decentralized finance (DeFi) published on December 30, 2024 (see Tax Alert 2025-0242). In both cases, tax reporting would be on new Form 1099-DA (see Tax Alert 2025-0213). The DeFi regulations in particular have been criticized by industry since they were proposed and are the subject of both a lawsuit to invalidate them and proposed legislation under the Congressional Review Act to repeal them. On the other hand, centralized exchanges appear to be moving toward compliance with the regulations that cover them. Both sets of regulations largely exclude foreign brokers because Treasury anticipated that the US would join the OECD's Crypto-Asset Reporting Framework, but it is unclear whether the new administration would carry that plan forward or amend the regulations to address foreign brokers. The question now becomes how impactful the EO will be on these regulations given the EO's stated objective of identifying "all regulations, guidance documents, orders, or other items that affect the digital asset sector" and determining whether such regulations and guidance should be "rescinded or modified." Questions also exist on the EO's impact on the current corporate alternative minimum tax (CAMT) and CAMT's application to digital asset companies. The Inflation Reduction Act (IRA) imposes a 15% minimum tax on the adjusted financial statement income (AFSI) of corporations with an average annual AFSI exceeding $1 billion over a three-year period. AFSI is a corporation's net income reported on its "applicable financial statement," with certain adjustments. Financial statement net income is usually calculated based on Generally Accepted Accounting Principles issued by the Financial Accounting Standards Board (FASB). For digital asset companies, however, the FASB issued guidance requiring the use of fair market value or marked-to-market accounting for cryptocurrency holdings. This accounting method will impact a digital asset company's AFSI and, therefore, its CAMT if they own significant appreciated digital assets. Essentially, such digital asset companies could be paying CAMT on unrealized gains and losses. Given the CAMT's potential impact on digital asset companies and the EO's mandate, questions arise as to whether changes to the CAMT are imminent, at least as it applies to the digital asset industry. The EO's mandate may also impact the IRS's current interpretation of "convertible virtual currency." The IRS in Notice 2014-21, issued frequently asked questions (FAQs) that concluded cryptocurrency should be treated as property, and not currency, for federal income tax purposes. The IRS has continued to supplement the initial 2014 guidance with several additional FAQs addressing common issues encountered on the taxation of cryptocurrency. It remains to be seen how the EO might impact these IRS interpretations. One set of policies the EO may advance are those in the Responsible Financial Innovation Act (RFIA), which was proposed by US Senator's Cynthia Lummis (R-WY) and Kirsten Gillibrand (D-NY) in June 2022 and again in July 2023. If enacted, the RFIA would establish regulatory and tax frameworks for companies holding and transacting in digital assets. As proposed in 2023, the RFIA would provide tax rules around de minimis exclusions from gross income for certain transactions, exclude from gross income digital assets received through mining or staking activities until those assets are disposed of, and align the nonrecognition rules governing securities lending transactions to transactions involving digital asset lending agreements. The RFIA would also extend the current safe harbor provisions under IRC Section 864(b) for securities and commodities trading activity by non-US persons operating in the United States to digital asset trading activities in certain circumstances. Treasury may recommend the enactment of such legislation in its report to the Chair of the digital asset working group and/or the President, which may increase the likelihood of such legislation's passage by the current Congress. Alternatively, Treasury may attempt to accomplish some of these policy goals through the regulatory process. As it relates to the creation of a "national digital asset stockpile," many state legislatures have already proposed legislation to create Bitcoin reserves at the state level. As of January 22, 2025, 12 states have proposed such legislation, including Alabama, Arizona, Florida, Massachusetts, New Hampshire, North Dakota, Ohio, Oklahoma, Pennsylvania, Texas, Utah and Wyoming. On the surface, the creation of a Bitcoin or digital asset reserve does not implicate tax issues, but these reserves or states' treatment of digital assets as legal tender may affect whether digital assets are treated as currency under state tax regimes. If the IRS and state governments start treating certain digital assets as currency, then many state tax issues arise, such as the taxability of those assets for corporations, pass-through entities and individuals at the state and local level. For corporations, issues such as whether digital assets transactions will be treated like currency transactions will affect how states require digital asset corporations to apportion revenue. In addition, digital asset corporations may begin to look more like financial institutions rather than general corporations for state income tax purposes.
Document ID: 2025-0380 | ||||||||