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New Legislation Proposes Clear Tax Guidelines for Crypto Block Rewards

The bill would make clear that taxes are owed only upon sale or disposition of tokens, not upon receipt of reward

A bill was introduced in Congress which would clarify that taxes on block rewards are not due at the time of acquisition, but instead upon their sale or disposition. The sensible policies this bill applies are in accordance with the nature of how tokens are created via staking, as well as proof-of-work networks, and match the recommendations Coin Center has made for years.

Over time, the Internal Revenue Service (IRS) has slowly addressed the tax implications of cryptocurrencies, often in improper and confusing ways. While the IRS addressed block rewards that occur through proof-of-work consensus mechanisms like Bitcoin back in 2014, the tax implications of other block rewards remained unaddressed until last year. Finally, in 2023, the IRS ruled that rewards from staking cryptocurrency count as income in the year they are acquired. The lack of clarity before this decision resulted in taxpayer challenges, most notably in Jarrett v U.S., in which Coin Center offered an amicus brief.

While the IRS finally chose to address the issue, both of its decisions regarding block rewards are inappropriate. As Coin Center has stated previously, block rewards are more appropriately classified as value creation due to a user’s actions and efforts, rather than income from an employer:

Any block reward from a permissionless cryptocurrency network, whether it is created through proof-of-work mining, proof-of-stake validating, or some other mechanism, is most accurately described as the creation of value through one’s own capital and labor rather than the receipt of value from an employer. The network allows users to create wealth from their own resources, it does not pay people for their labor. Why is this the more sensible characterization? Creators of block rewards literally do not get paid by anyone. Who is the employer when you are working for the Bitcoin network? Just as truly permissionless decentralized networks lack third party promoters upon whom users rely in the context of securities law, they also lack discernible employers and employees in the context of income tax law. To be clear, that does not mean that block rewards can or should be tax free, simply that they should be taxed like crops, minerals, livestock, artwork, and assembly line widgets: they should be taxed when they are sold, not when they are created.

This bill introduced today by Representatives Drew Ferguson and Wiley Nickel would address this problem by requiring that taxes on block rewards – whether derived from proof-of-work or proof-of-stake networks – should not be applied at the time they are acquired, but at the time they are spent, sold, or otherwise disposed of. This simple policy would resolve major issues with how cryptocurrencies are taxed today and put the technology on a level playing field.

We have been advocating for a solution exactly like this since 2019, and we have worked with several Members of Congress who have been urging this change for years. This bill is another addition to simple, common-sense solutions to address the taxation of cryptocurrencies like providing for a tax-free de minimis threshold for cryptocurrency transactions, and a safe harbor against tax penalties until the IRS actually addresses the various tax implications of cryptocurrencies.

We applaud Representative Ferguson for introducing this common-sense legislation and hope Congress’ actions will rectify the IRS’ confusing tax policies that could have been addressed several years ago. We look forward to continuing our efforts to enact this policy and provide for the sensible application of tax treatment when it comes to cryptocurrencies.