The Senate Finance Committee's October 1 hearing on "Examining the Taxation of Digital Assets" aired some differences of opinion on some of the main tax issues related to cryptocurrency, including whether a de minimis rule to exempt small-dollar transactions is appropriate or creates the potential for abuse, and whether a new subset of tax rules is required for crypto or current law is sufficient. It was a departure from the July 16 House Ways and Means Oversight Subcommittee hearing, where members of both parties called for new crypto tax rules and the industry was fairly united in requesting action on a few key issues.

In an opening statement, Chairman Mike Crapo (R-ID) said the tax code does not provide straightforward answers for many digital asset transactions, including "whether someone is buying a cup of coffee, donating to charity, investing, lending, mining or staking." Ranking Member Ron Wyden (D-OR) noted the lack of certainty in how tax rules apply to cryptocurrency and said that could be a contributing factor to the tax gap, or difference between taxes owed and paid. He said some crypto businesses are akin to sports gambling companies and the Senate needs to conduct a careful examination of the issues involved.

Witness testimony:

• Jason Somensatto of Coin Center called for a de minimis exemption for low-value personal transactions, clarifying that block rewards should be treated in line with existing tax rules applicable to newly created property, and revisiting the Infrastructure Act's reporting provisions.
• Andrea Kramer of ASKramer Law, LLC said the existing tax code "is flexible enough to have been called upon to tax new asset classes over the years and digital assets are no exception," but also that there is room for "a few tweaks."
• Lawrence Zlatkin of Coinbase Global, Inc. said because digital assets are treated as property, a $4 coffee purchase "triggers a taxable event that must be tracked and reported" and, multiplied across thousands of small transactions, "the compliance burden quickly becomes unmanageable."
• Annette Nellen, a professor at San José State and chair of the Digital Assets Tax Task Force at the American Institute of CPAs, recommended that Congress incorporate digital assets into the existing framework under Section 475, "which would require a dealer of digital assets to use the mark-to-market method and would allow traders of digital assets to elect to use the mark-to-market method to report their income."

During questioning from Chairman Crapo, there was some disparity about the need for a de minimis exception. Kramer said there is the potential for abuse and setting a dollar amount level for digital assets should be crafted in a way that is more specific than the current exception for foreign currency. Somensatto said a de minimis rule would make sense and allow consumers to take advantage of a value transfer without the tax system being a deterrent. On the issue of parity, Zlatkin said cryptocurrency should not be penalized through less clarity than what is provided for other financial products.

Ranking Member Wyden asked whether, under a de minimis rule with an annual cap, reporting would still be necessary so taxpayers know their gains for each transaction. Nellen said they would need to keep track of transactions for the sake of compliance.

Senator Steve Daines (R-MT) said he is working on a framework for cryptocurrency tax issues. "This Committee needs to do our part to address the tax side of the ledger," he said. He asked about the risk to the role of the US as the world's digital asset leader if the government cannot provide tax clarity. Zlatkin cited the issue of sourcing, saying it is determinative as to whether withholding tax applies to investors, and those outside the US don't know whether the source rules for staking or digital asset lending are foreign or domestic. For a foreign person, the source should be foreign and not be subject to withholding tax, he said.

Senator Maggie Hassan (D-NH) said an innovative cryptocurrency industry must be balanced with strong national security protections. Nellen noted that IRS provided guidance in 2014 by saying, under tax law, that cryptocurrency is property, though there are some unique things that happen with digital assets. However, she also said the qualified appraisal required for donations of cryptocurrency hampers donations and could be changed to be satisfied if the currency is on a qualified exchange, like a taxpayer donating publicly traded securities.

Senator Elizabeth Warren (D-MA) said proposals could be drafted to plug holes that allow cryptocurrency to escape taxation, as opposed to providing special, more favorable rules that the industry is arguing for. She said the purchase of a small amount of gold or stock would require reporting, meaning a de minimis cryptocurrency rule would provide special treatment; and there are proposals for miners and stakers to defer taxes on income until they sell, meaning they could pay less in taxes than accountants for essentially the same work. Senator Warren argued for similar treatment for risks and other factors across financial products.

Continuing a similar line of questioning, Senator Tina Smith (D-MN) noted that miners and stakers get paid for validating the blockchain, which is performing an essential service, and the tax system imposes a tax when someone is paid for providing a service in return for compensation. Kramer said the issue is whether stakers and miners are providing a service, which appears to be the case. "I understand that the crypto industry isn't asking for a tax exemption but … there's a benefit to deferral of your taxes," Smith said.

Senator Todd Young (R-IN) asked whether Revenue Ruling 2023-14 is inconsistent with longstanding tax principles and whether IRS should replace it with guidance that defers taxation until disposition. Somensatto said, "Yes, we have called for that." Asked how Revenue Ruling 2023-14 affects the ability to attract capital, Zlatkin said income should occur not upon receipt of a digital asset and creation of property but when it is disposed of and monetized in the form of cash. "So, I think rescinding it is extremely important," he said.

Senator Marsha Blackburn (R-TN), who said she is working with Senator Cynthia Lummis (R-WY) on the issue, asked witnesses about the most important priorities to include in crypto tax law:

• Somensatto said addressing how staking and mining rewards are taxed, recognizing how the technology works.
• Kramer said we want to make the US a magnet for foreign investment and need to be clear on the rules of what is subject to tax.
• Zlatkin called for general rules of the road, including sourcing rules, parity with financial services and digital asset lending, asset management, encouraging investment in the US, clarifying staking and grantor trusts for ETFs.
• Nellen said mark-to-market, lending, and qualified appraisals are among issues where rules are needed in the tax law.

In addition to Senators Daines and Blackburn saying they are working on the issue, proposals have been put forward in both chambers. Rep. Max Miller's (R-OH) July discussion draft and Senator Lummis' June bill (S. 2207) address a similar set of crypto tax issues, including a de minimis rule, staking, and wash sales.

Opening statements and testimony are available here.