President Biden’s Budget Proposal Would Bring Big Changes for Digital Assets

President Biden revealed his budget proposals for Fiscal Year 2025 on March 11, 2024; with the Treasury releasing the “Greenbook” shortly after. The proposed changes include several provisions relating to the treatment of digital assets, including imposing an excise tax on energy used for digital asset mining and applying the wash-sale rule to digital asset transactions. While these proposals are not guaranteed to be taken up by Congress, previous proposals such as new digital asset broker reporting requirements and adding digital asset sales to 6050I reporting requirements have become law.

Mining Energy Usage Excise Tax

The budget contains a proposal to impose an excise tax on the electricity used by digital asset miners. The stated purpose of this proposal is twofold: to reduce mining activity and reduce the environmental impacts mining activity has. 

This provision would subject any firm using computing resources to mine digital assets to an excise tax equal to 30% of the electricity costs used in digital asset mining. Firms would be required to report the amount, type, and value of electricity used. For firms that produce or use power off-grid, the excise tax would be 30% of the estimated electricity costs. The proposal would phase-in the excise tax over three years after its enactment, with the first year levying a 10% excise tax, the second year a 20% excise tax, and the full 30% excise tax beginning in the third year. 

Opponents of this provision have expressed the concern that this would stifle innovation and ultimately lead to the offshoring of mining operations currently operating in the U.S. The U.S. Department of Energy recently withdrew an “emergency collection request” that would have required U.S. mining companies to provide information about the amount and nature of energy they consume. This came after a lawsuit was filed against the agency alleging that the survey requirement violated the Administrative Procedure Act and Paperwork Reduction Act.

Application of Wash Sale Rules to Digital Assets

Under IRC Sec. 1091, if a taxpayer purchases the same or substantially identical stock or securities within 30 days before or after a sale that results in a loss, that loss is disallowed. This transaction is referred to as a “wash sale.” The loss is rolled over as additional basis in the stock or security acquired and will eventually be allowed upon the final disposition of the stock or security. 

Currently, wash sale rules do not apply to digital assets because they are defined as “property," not “securities.” The proposal would apply the IRC Sec. 1091 wash sale rules to the sale of digital assets. Brokers would be required to reflect the inclusion of digital assets under IRC Sec. 1091 on Form 1099-B. 

This provision has gained some support in Congress as well. Multiple bills have been introduced to apply wash sale rules to digital assets over the past few years. The original Build Back Better Act, which eventually became the Inflation Reduction Act, contained a provision that would have applied wash sale rules to digital assets. Taxpayers should continue to monitor this proposal as it may eventually become law. 

Application of Securities Loan Rules to Digital Assets

Under IRC Sec. 1058, taxpayers are not required to recognize gain or loss in connection with a loan of securities, provided substantially identical securities are returned to the transferor and the transferor retains their risk of loss or opportunity for gain during the term of the loan. The budget proposal would affirmatively apply the same nonrecognition treatment to loans of “actively traded” digital assets (as determined by the Secretary of the Treasury) where the loan agreement is similar to loans of securities. The transferor/lender of digital assets would be required to recognize income from events such as staking rewards or air drops at the time the income is earned. 

This provision could provide clarity to those who use digital assets as collateral in loan arrangements, particularly in light of the broker reporting requirements. The IRS has not released any guidance addressing whether a loan of a digital asset should be reportable as a sale. This change would affirmatively treat digital assets as securities solely for purposes of IRC Sec. 1058, which would clarify that such use is not considered a sale for IRC Sec. 6045 reporting. 

Reporting Requirement for Exchange of Information

The budget proposal contains a provision that would require certain financial institutions to report the balance of any account maintained at a U.S. office and held by foreign persons. The provision would require brokers, such as U.S. digital asset exchanges, to report information relating to foreign owners of passive entities. 

The brokers would be required to report gross proceeds and “other information as the Secretary may require” regarding sales of digital assets to customers and their substantial foreign owners. The stated purpose of this provision is to allow the United States to share information automatically with partner jurisdictions, allow for reciprocal information sharing on U.S. taxpayers who engage in digital asset transactions outside the U.S., and reduce the potential for tax evasion using digital assets. 

Required Reporting of Foreign Digital Asset Accounts (FATCA)

Under IRC Sec. 6038D, any individual who holds an interest in one or more specified foreign financial assets with an aggregate value of at least $50,000 must report certain information on their individual tax return (typically referred to as a FATCA requirement). 
Current law defines a specified foreign financial asset as:

1. a financial account maintained by a foreign financial institution, or
2. certain specified foreign assets not held in a financial account maintained by such financial institution.

This provision would amend FATCA to add a third category of asset: any account that holds digital assets maintained by a foreign digital asset exchange or foreign digital asset service provider. The determination of whether an account is “foreign” would be based on the location in which the exchange or service provider is established or organized. 

Application of Mark-to-Market Rules to Digital Assets

IRC Sec. 475 requires dealers in securities to use the “mark-to-market” method of accounting for securities that are held at the end of the year. Under this method, dealers must recognize gain or loss on certain securities as if they were sold on the last day of the year. The resulting gain or loss is treated as an ordinary gain or loss unless certain requirements are met.  

The budget proposal contains a provision that would allow dealers and traders of actively traded digital assets or derivatives on (or hedges of) those digital assets to elect to use the mark-to-market method. The Secretary would determine which digital assets are considered to be “actively traded,” which could include consideration of the volume of trading of the asset or whether the asset is regularly bought and sold for fiat currencies. 

Impact of Proposed Changes

It is estimated that these changes would increase revenue by just under $50 billion over ten years. Many of these provisions have been proposed in previous years’ budget proposals without being enacted by Congress. However, these proposals can provide insights into current and future legislative priorities and trends.

Due to the nature of digital assets as an emerging and decentralized technology, the government has a significant opportunity for additional regulation and revenue-generating proposals. Proactive taxpayers should engage a trusted tax advisor to meet their current filing obligations while remaining informed of any potential future changes.