Biden budget proposal adds new tax rules for crypto

Digital assets would not be added to the existing mark-to-market rules as securities or commodities. Instead, they would be their own separate third category. This category would include both digital assets and their derivatives. 

However, it would only apply to some digital assets. Treasury Secretary Janet Yellen and her delegates would decide which assets qualify based on several factors. 

According to the Treasury’s official explanation of the new rules, these factors would include, “Whether the asset is regularly bought and sold for U.S. dollars or other fiat currencies, the volume of trading of the asset on exchanges that have reliable valuations, and the availability of reliable price quotations.” 

Foreign crypto accounts

The second rule would require a taxpayer to report their digital asset accounts held in other countries if the value of those accounts exceeds $50,000.

Under the current law, anyone who holds $50,000 or more in a foreign asset in a foreign financial account is required to report it to the IRS. 

The new rule would expand the law to include digital assets, which would again be listed as their own asset category.

The Treasury explained that this change came as an effort to crack down on tax evasion. 

“The global nature of the digital asset market offers opportunities for U.S. taxpayers to conceal assets and taxable income by using offshore digital asset exchanges and wallet providers,” the Treasury wrote in their statement. 

Securities lending with crypto

Third, the Biden budget proposal expands the existing rules on securities loans to include digital assets. 

Traditional securities loans receive nonrecognition treatment if they meet certain requirements. This means they are seen as transactions without a recognized gain or loss. 

The intention with these requirements is ​​so the taxpayer making the loan “remains in an economic and tax position similar to the position it would have been in absent the loan.”

The Treasury stated that the market for crypto lending has rapidly expanded in recent years, and that some of these loans have similar terms as traditional securities.

To address this growth of crypto loans, the budget proposal would extend the current securities loan nonrecognition rules to apply to digital asset loans, as long as those loans have similar terms as the ones currently required for traditional securities. 

Information reporting on foreign owners for tax purposes

Lastly, the proposal makes provisions for information reporting on foreign financial accounts. The purpose of this rule is also to combat tax evasion from offshore accounts.

Currently, countries already exchange relevant tax information about foreign accounts in their jurisdictions under the Foreign Account Tax Compliance Act (FATA). 

The Biden administration would expand the existing rules to also cover digital assets. The Treasury stated that the rule would “require brokers, such as U.S. digital asset exchanges, to report information relating to the substantial foreign owners of the passive entities.”

The reporting could also include information on gross proceeds from digital asset sales and “such other information as the Secretary may require with respect to sales of digital assets with respect to customers.”

What happens next?

The Biden budget proposal will be sent to Congress and voted on later in 2022 before the government’s next fiscal year begins.

The Biden administration predicts that by 2032, $11 billion in revenue could be generated from these new crypto rules. They believe as much as $4.8 billion would come from adding crypto to mark-to-market rules. 

The proposal says the rules would go into effect for tax years beginning after December 31, 2022.