Full Committee Legislative Hearing on Digital Asset Taxation

The committee will come to order. Today marks the first legislative hearing in this committee um in years, uh which highlights the importance and complexity of digital asset taxation. The digital asset status quo is untenable. America needs clear tax rules of the road to remain the crypto-capital Recent data indicate that a quarter of Americans, or over sixty-seven million people, own cryptocurrency. That's a dramatic increase from only three percent at the start of this decade. Nearly a quarter of cryptocurrency holders earn less than seventy-five thousand dollars. And the average crypto holder is nearly as likely to work in construction, manufacturing, or food service, as tech or finance. Crypto owners live in every community, urban, rural, and everywhere in between. Today, cryptocurrency has a market capitalization of over two trillion dollars. That's a massive industry by any measure. And nearly all other industries of a similar size enjoy clear tax policies. The days of debating whether digital assets are a passing fad are gone. Continuing their current growth, digital assets will only become further integrated into the economy. Americans need simplicity and clarity to own, trade, and use digital assets with confidence. Digital asset businesses, many of which are homegrown American innovations, need consistent rules tailored to digital assets. Our committee's work has identified three key gaps in the current tax regime that make it harder for Americans to fully participate in the digital asset ecos- ecosystem. First, common common digital asset transactions, like mining and staking, do not fit clearly into existing tax law. In other places, the tax code is silent as to the treatment of digital assets. The ambiguity creates an opening for taxpayers to exploit the law and avoid paying tax in some circumstances and creates unfair tax burdens in others. Second, digital assets do not receive the tax benefits nor the protection from anti-abuse rules long granted traditional financial assets. The imbalance between digital assets and traditional financial assets creates a two-tier system that unintentionally favors certain assets over others. Third, crypto owners face burdensome tax compliance that makes using digital assets in ordinary commerce almost impossible. Thirty-one percent of crypto owners would like to buy a cup of coffee at the local shop. Yet, each five dollar cup of coffee bought with a digital asset generates two new pieces of tax paperwork. As a result, the IRS gets hundreds, hundreds of millions of such tax forms each year, called ten ninety-nine DAs. That do l- that do little more than burden taxpayers. The Ways and Means Committee engaged in months of thoughtful discussion to build a lasting framework for digital asset taxation. The eight bills and discussion drafts we are examining today offer solutions to major challenges of clarity, parity, and administration of the tax code. The first bill we will examine lowers the tax burden on ordinary digital asset owners, by excluding the small amount of gain or loss from tax reporting when a digital asset is used to pay network fees. Like when checking out at the grocery store using crypto. This bill from Representative Rudy Yackem extends the same exclusion of gain or loss from minor fluctuations in regulated US dollar stable coins. Mister Yackem's bill also grants taxpayers who frequently use certain digital assets the flexibility to choose to provide one combined annual income calculation for digital assets, instead of calculating gain or loss on each individual transaction. Together, these policies dramatically reduce the burdensome reporting currently required of taxpayers. The second bill introduced by Representative Mike Kerry clarifies the tax treatment of mining and staking rewards by treating them as ordinary income. but also allows miners and stakers to treat this income like self-created property, depending on which method best matches the timing and character of the rewards. The bill also provides a safe harbor for exchange traded digital asset funds to receive staking rewards, which boosts the returns for Americans invested in these financial products. The next bill insures that traditional financial assets and digital assets receive simil- similar tax treatment. Legislation from Tax Subcommittee Chairman Mike Kelly removes the requirement that charitable donations of widely traded digital assets undergo a qualified appraisal in order to claim a charitable tax deduction. By doing so, this bill applies the same treatment to digital asset donations that already applies to stocks that are traded on an established stock exchange. Legislation from Congressman David Kustof extends tax benefits available for traditional assets to digital assets. Our financial markets rely on these benefits to encourage foreign investment and improve liquidity. Under this bill, digital assets would be covered by the securities lending safe harbor, the securities trading safe harbor, and a special method of accounting for dealers and traders. Our hearing will also examine the application of long-standing anti-abuse rules to digital assets. These rules protect the integrity of tax filing and prevent bad actors from taking advantage of the tax code. Legislation from Representatives Representative Jody Errington extends the anti-abuse rules to digital assets so that the tax code treats investors in digital assets the same as other investors. The current landscape of vague laws paired with a high compliance burden make taxpayers fearful of correcting previous mistakes. Legislation offered by Representative Aaron Bean creates a limited one-time disclosure program for taxpayers. to voluntarily come into compliance for past digital asset tax filings. This bill does not eliminate the interest on back-do tax or the tax itself, but it does provide a simplified way to correct mistakes and reduces penalties for taxpayers who want a clean slate. We will also examine a discussion draft that ends a complicated scheme, where taxpayers establish residency in a territory and then take advantage of complicated regulations to avoid paying capital gains tax on digital assets. Digital asset taxation does not have to turn into a partisan fight. I want to note the leadership of Congressman Miller and Congressman Horsford in showing digital asset taxation can be addressed in a bipartisan way. Representative Horsford has brought forth a discussion draft that looks at issues regarding mining and staking rewards and the charitable deduction. Other countries like Singapore and Switzerland have already implemented comprehensive tax regimes that offer clarity to digital asset owners. Congress must act now and enact clear tax rules to ensure America remains the global leader in digital assets. If Americans want to pay with a stable coin, instead of a credit card or cash, they should be able to without a pile of tax paperwork. If a hairdresser, a gig worker, or a small business owner wants to accept digital assets as payment, they should not be treated any worse from a tax perspective than payment in cash or credit. Our tax system should not be picking the winners and losers. That is why these bills focus on removing the tax advantages and disadvantages for Americans who use digital assets. I want to thank our expert witnesses for being here, and I look forward to our discussion today. I'm pleased to recognize the Ranking Member, Mister Nill, for his opening statement.

Thank you, Chairman, and thanks to our witnesses for being with us this afternoon. We are here to address the taxation of digital assets, which have taken quite a bit of the committee's time this year. In light of many of the struggles that are taking place for the American family, I hope that we will also be able to devote more time to the price of gas, groceries, energy, housing and health care, which continue to soar, and we want to be involved in finding solutions to those problems as well. Notwithstanding that observation, I'm glad to see that the majority is holding this legislative hearing. We're wading into a novel topic with a degree of caution. which is an important consideration. If there is one thing that I can say that is bipartisan for sure, it's the need for more education on this topic of digital assets on both sides of the aisle. One of the most important questions that face all of us is the level of risk, and who eventually will underwrite it. We have before us six bills and a discussion draft, and my initial observation is that there are some aspects of these bills that are quite sensible. providing clear rules of the road for taxpayers looking to comply with the law. Other provisions sought a common sense goal of allevi alleviating burdensome paperwork requirements, especially in situations where it's highly unlikely that there would be any tax associated with those transactions. And indeed, there are provisions that would close loopholes that are specific to the digital asset industry, another goal that I think we all share. At the same time, it appears there are some provisions that deviate substantially from general tax principles, providing a distinct advantage that are beyond some other investments. We want to be careful about putting a thumb on the scale, and as we all know, it's much easier to put something into the tax code than it is to take it out. I hope that we will consider building the necessary buffer as it relates to the element of risk that I highlighted just a moment ago. Mr. Chairman, you've stated that the goal here is to have a strong bipartisan piece of legislation. I'm aligned with that goal eventually. There's healthy skepticism on both sides, as evidenced by the fact that there are still large numbers of Congress members who don't comprehend all of the questions that we are currently discussing. Let me also single out Stephen Horsford, who's been a leader on our side, and he's been quite engaged in these negotiations. This hearing's a good step. My suggestion is that we listen carefully to our witnesses and bring up many of the various concerns on all and both sides of the questions in it across the aisle. There is only one way to truly develop a bipartisan product, and that is to hear what has to be said, but also understanding the role, as I have mentioned twice already, where risk might take us. Thank you, Chairman.

Thank you, ranking member. I will now introduce our witnesses. Miss Sarah Riley is Vice President and Senior Tax Counsel for Fidelity Investments. We have Mister Lawrence um Slotkin is Vice President of Tax for Coinbase. We have Mister Jason Soman Sotto um is the Director of Policy for Coincenter. And Mike Kircher is Deputy Director for the Tax Law

Chairman Smith, Chairman Smith, Ranking Member Neal, Ranking Member Neal, and members of the committee, members of the committee, thank you for the opportunity to testify today thank you for the opportunity to testify today on the need for digital asset tax legislation. on the need for digital asset tax legislation. My name is Sarah Riley and I'm a Vice President and Senior Tax Counsel at Fidelity Investments based in Boston, Massachusetts. I'm an attorney in the corporate tax group focused exclusively on digital asset tax issues. Thank you to the committee for its leadership, diligence and foresight in undertaking the complex task of crafting tax legislation to bring much needed clarity and certainty to the digital asset ecosystem. I appreciate having had the opportunity to work directly with many members on the committee and their dedicated staff over the past year. Your time and focus on these issues has been extraordinary. And thank you for the opportunity to appear before you today and to share Fidelity's perspective on digital assets. and the importance of implementing a modernized tax framework. It enacted the proposed legislation would remove tax-related barriers to US innovation and competitiveness in the digital asset space, allowing for blockchain technology to flourish in the United States. For over eighty years, Fidelity has been focused on helping our customers invest and build financial security. Today we serve millions of investors across retirement, brokerage, and workplace benefits, with seven trillion dollars in assets under management. Fidelity offers unique perspectives in the digital asset space. As one of the only established large financial institutions actively involved in the digital asset ecosystem, we are a bridge between traditional finance and digital assets. Fidelity has been engaged in the digital asset space for more than a decade. We began research and development on digital assets in twenty fourteen, and have supported customers' access to digital assets across institutional and retail channels since twenty eighteen. Fidelity now supports customers with respect to digital assets across custody, trading, retirement accounts, exchange traded products, payment stable coins, and block chain research. That experience gives us a well-informed view of where existing tax rules map well to digital assets where they do not and where legislative clarification is needed. As digital assets play an increasingly important role in the US financial system and broader economy, the tax code must be modernized to provide taxpayers with clear consistent and administrable rules. Although the impact of tax uncertainty may have once been viewed as affecting primarily crypto-native market participants, The increasing use of blockchain technology in traditional finance has expanded its relevance. As a result, the lacks of lack of tax clarity affects not only those directly involved in the crypto space, but also the financial sector at large. For example, tokenized securities and payment stable coins all run on blockchain. Most tax code provisions that could potentially apply to digital assets were written before the broad adoption of and therefore without contemplating digital assets. And the limited amount of sub-regulatory guidance addressing digital assets has proved wildly inadequate. General tax principles are a useful starting point, but cannot address the full scope of new challenges and complexities introduced by digital assets including how to accommodate the broad range of use cases. Clear and administrable tax rules consistent with existing tax principles are needed to address issues that are unique to digital assets and block chain technology such as timing, character, insourcing, evaluation, activity and rewards in the tax treatment and reporting of payment stable coins, and areas where digital assets are similar to traditional f- but face disparate treatment, such as in the context of US securities and commodities trading safe harbors, mark-to-market accounting, and non-recognition treatment for securities lending transactions. Absent legislative action, tax uncertainty has real and harmful consequences. It undermines taxpayer confidence and exposes taxpayers to unnecessary risk. It can produce inconsistent taxpayer outcomes and create opportunities for more sophisticated taxpayers to take aggressive positions. It makes compliance more challenging, particularly for those without access to specialized tax advisors. And it incentivizes the offshoring of innovation and infrastructure impairing US competitiveness. On behalf of Fidelity and the millions of customers we serve, we appreciate the invitation to share our views and contribute to this important dialogue. We commend the tremendous work of the committee in putting forth a tax framework that would address key areas of uncertainty in the digital asset space, and provide a critical and much needed foundation for taxpayers. while balancing the priorities of clarity, parity and administrability. We look forward to continuing to work with the committee to implement a modernized tax framework for digital assets. Thank you.

Thank you, Mr. Slotkin. You may begin when you're ready.

Chairman Smith, Ranking Member Neal, and distinguished members of the committee, thank you for the opportunity to testify today. My name is Loren Slotkin. I serve as the Vice President of Tax at Coinbase. Before joining Coinbase, I spent nearly twenty-five years as a corporate tax executive a general electric. During that time, I learned a simple lesson that applies to every market, every taxpayer, and every industry. When tax rules are clear, people comply. When they're unclear, complexity grows, costs rise, and economic activity moves elsewhere. That principle is especially important for digital assets. Today millions of Americans own or use digital assets, yet much of the tax code still treats this technology as though it were a niche experiment, rather than a growing part of the financial system. The result has been confusion for taxpayers, compliance challenges for businesses, and unnecessary burdens for the IRS. I want to commend Chairman Smith, Ranking Member Neal, the members of this committee, and the bipartisan staff who have spent years working through these issues. The legislative bills before the committee represent the most comprehensive effort to modernize digital asset taxation that we have seen to date. Most importantly, This legislation recognizes a fundamental reality. Market structure and tax policy go hand in hand. Market structure sets the rules of the road. Tax policy determines whether Americans actually choose to use that road. The Clarity Act is moving through the Senate, but this committee shouldn't wait on the tax side. Clear tax rules will strengthen the emerging market structure framework, and further delay only pushes activity, capital, and innovation offshore. The legislation contains several important highlights. First, it brings common sense treatment to payment stable coins. Genius Act compliant stable coins maintain a one-to-one relationship with the US dollar, requiring taxpayers and the IRS to track gains and losses on transactions that generally produce little or no economic gain creates significant administrative burdens, without meaningful tax revenue. The deemed basis framework included in Congressman Yakim's bill is an important step forward. towards making stablecoin payments practical while reducing unnecessary reporting noise. Second, the legislation recognizes the unique mechanics of blockchain networks by providing relief of small validation in network fees. Every blockchain transaction requires these automated infrastructure costs. Treating every small network fee as a taxable event creates complexity far out of proportion to any revenue impact. The committee's approach is a meaningful step toward aligning tax rules with how technology actually functions. Third, Congressman Kerry's bill provides long-needed clarity for mining and staking rewards, helping ensure taxpayers are not forced into tax obligations before they have generated liquidity through an actual sale. This improves administrability while supporting domestic investment blockchain infrastructure. Finally, we appreciate the committee's discussion to pair taxpayer relief with market integrity measures including wash sale and constructive sale rules, while providing a reasonable implementation period for brokers. While we strongly support the direction of the legislation, we believe several targeted improvements would strengthen the final product. First, Congress should go further by establishing a personal transaction to minimus exemption for all digital assets, including bitcoin. Congressman Yacoubian's bill removes tax friction on network fees, but a consumer who uses bitcoin to buy a pair of jeans still has to calculate and report a capital gain. That's not good tax policy. Americans should need an accountant to buy jeans, and the IRS doesn't benefit from tracking millions of transactions that generate little or no revenue. Second, Congress should ensure that any future international reporting requirements are carefully coordinated with existing U. S. reporting frameworks, so that American businesses are not subjected to duplicative and conflicting compliance regimes. Mister Chairman, the legislator before the committee demonstrates that we do not have to choose between strong tax compliance and technological innovation, we can achieve both. By modernizing the tax treatment of digital assets, Congress has an opportunity to provide certainty for taxpayers, reduce administrative burdens, strengthen compliance, and reinforce America's leadership in the next generation of financial infrastructure. I believe the bills before us are a vital step toward that goal. Thank you for the opportunity to testify today. I look forward to your questions.

Thank you, Mr. Soman Soman Sato. You may begin.

Chairman Smith, Ranking Member Neal, and members of the committee, I thank you for the opportunity to testify today. My name is Jason Samansato and I am the Director of Policy at CoinCenter, a nonprofit focused on cryptocurrency and public blockchain policy. For several years, former Secretary of Defense Donald Rumsfeld sent the IRS a letter with his tax returns. The two thousand fourteen version read, "As in prior years, I have absolutely I n- no idea whether our tax returns and tax payments are This is amazing because I doubt Secretary Rumsfeld even used Bitcoin. Taxes are already complex. Crypto-tax compliance is even harder, in part because our tax system assumes that most financial activity runs through intermediaries that can track, summarize, and report transactions for their customers. That assumption may work tolerably well when the people use banks, brokers, and payment processors. It breaks down when Americans use open cryptocurrency networks that were designed to allow users to transact directly with each other. That is the core problem before the committee. A tax system should collect what it is owed, but it should not require Americans to give up the freedom to use open networks, simply to make tax compliance practical. The current reality is that crypto users are expected to maintain detailed records of virtually every transaction, track changing market values, determine the tax treatment of very complex activities, and calculate gains or losses on transactions that may be only worth a few dollars. What often feels like sending a simple electronic payment, using an app on a phone, or receiving a reward in a video game, can trigger tax consequences that require a substantial rep- record keeping and analysis. The result is perverse. A technology that is designed to reduce reliance on intermediaries can become difficult for ordinary Americans to use unless they turn to the intermediaries simply to manage tax paperwork. For this reason, CoinCenter is encouraged by the committee's work here today. The bills being discussed make progress toward three key reforms that CoinCenter has recommended for years. First, Rec- Representative Yackem's Less Tax Paperwork for Digital Asset Owners Act would reduce the compliance burden on individual taxpayers by exempting gains from certain stable coin transactions and gas payments. Congress has long recognized that some ta- transactions technically produce taxable income but are not worth the administrative burden required to measure and report them accurately. The point is not that these transactions are outside the tax law in theory. The point is that the tax system has never realistically expected ordinary Americans to perform capital gains accounting for every low-value exchange of personal property. If someone sells an old rug on Facebook Marketplace They usually do not stop to calculate the basis and gains on that transaction. If a twelve-year-old trades baseball cards with a friend, we don't expect her to file form ten forties. We strongly recommend that the committee also consider extending the exemption to low-value transactions and non-stablecoin cryptocurrencies like Bitcoin modeled after the personal, finan- foreign currency transaction exemption. The tax code should not privilege certain types of cryptocurrencies over others. Whether someone uses stable coins like USDC or Tether, or cryptocurrencies like Bitcoin, Ether, and Solana, a reasonable to minimus rule should protect taxpayers from gotcha consequences on small transactions. Second, we are encouraged by the exploration of a simplified accounting election for taxpayers who engage in high volumes of crypto-transactions. Coin Center has advocated for a mark-to-market style election because it could substantially reduce tax complexity for many users. In contrast, CoinCenter does not support applying wash-sale rules to cryptocurrency transactions. Those rules are a poor fit for open cryptocurrency networks, just as they are for most commodity-like assets, and would create substantial new compliance burdens. If Congress nevertheless imposes them, the simplified accounting election offered by Representative Yackem would be an essential mitigation and not a substitute for getting the underlying policy right. Finally, we appreciate the committee's effort to clarify the tax treatment of block rewards and the tax clarity for mining and staking act from Mister Kerry. Coincenter has long argued that newly issued cryptocurrencies awarded to validators should be taxed when sold or exchanged rather than when created. This approach better reflects the reality of block rewards as newly created property and fixes a fundamental mismatch between current IRS guidance and the mechanics of how these networks actually operate. In short, Congress can make crypto-tax compliance simpler without creating spec- special tax preferences. It can preserve tax enforcement while removing traps for ordinary users. And it can do so without forcing Americans back into the intermediated system that open networks were designed to make optional. Thank you, and I look forward to your questions.

Mister Kircher, you may begin when you're ready.

Chairman Smith, Ranking Member Neal, and distinguished members of the committee. Thank you for the opportunity to testify today. As someone who follows this space closely, I hear a lot about how we need to write rules of the road for taxing digital assets. This is a helpful metaphor, but I might tweak it slightly. The tax system is built to be adaptive to any economic activity or new industry, and that includes digital assets. So when we talk about the need for metaphorical rules of the road, In tax, the road already exists and it already has rules. But new industries and structures can create potholes for the tax system. Left unchecked, these potholes can turn into sinkholes that beget massive tax shelters. Policymakers should look out for these and address real problems we've seen as the digital assets industry has grown. And keep in mind the first rule of road maintenance, don't make the roads worse. As these bills progress, I encourage policymakers to consider three tax policy principles most closely, parity, administrability, and guardrails to prevent abuse. Some of the provisions in these bills would make improvements consistent with these principles. For example, one of the bills would extend anti-abuse regimes like wash sale rules and constructive sale rules to digital assets. That's a good idea. Another example is the de minimis provision on qualifying stable coins. A targeted approach with guardrails can reduce paperwork and compliance burdens without creating substantial hidden tax subsidies for digital assets. But the rule should remain targeted because a broader de minimis provision risks abuse and would favor investments in digital assets, over those in traditional finance. There are some provisions in these bills that do provide subsidies or create risks of abuse. Take, for example, the d- uh the bill addressing the treatment of mining and staking rewards. These rewards are payments in digital assets for validating transactions, similar to the income earned by a notary for validating documents. First, the bill makes explicit the current rule that rewards are taxable when earned. That's the correct policy and it's already the law. It's consistent with long-established tax principles. It's consistent with section sixty-one and the IRS position. It's consistent with how income from other similar activities are treated. And it's consistent with a correct tax court ruling from last week, which found that staking rewards are taxable on receipt, rejecting the taxpayers' arguments as moot, irrelevant, or without merit. The problem is that the bill then provides an election for stakers and minors, to defer income paid in the form of newly minted coins until disposition. This violates parity with traditional finance and the principle that income is taxed on receipt. Economically, it functions as an interest-free loan from the government. Here's one example of how this could play out in the real world. The Clarity Act would allow consumers to earn deposit-like interest on stable coin balances had in a held in accounts. If clarity and deferral become law, consumers will get a better tax result by investing in stable coin accounts, than in high yield savings accounts at a bank. Deferral would become a new tax subsidy, encouraging investment in digital assets relative to other types of investment, risking deposit flight from banks into accounts that lack important FDIC insurance. Deferring tax on mining and staking rewards isn't just a distortive subsidy, It could also undermine administrability. Deferral increases complexity for taxpayers and makes it harder for the IRS to do its job. The government will need to write new rules, taxpayers will need to track and trace various aspects of transactions over many years. It would be simpler for everyone to tax the income upon receipt, consistent with normal tax principles. Deferral on mining and staking rewards also creates risks of abuse. Despite some thoughtful guardrails in the bill, it may be possible for taxpayers to permanently escape tax by earning rewards through certain business structures. This would convert an interest-free loan from the government into a loan that never has to be paid back. This is a better tax treatment than even what traditional retirement plans offer. Here's my final point. To date, industry has properly identified some of the potholes. The wash and constructive sale rules are good examples. But if you're out fixing potholes that others have flagged, it's worth fixing the other ones you see along the way. For example, the risk from non-compliance for digital assets operating on decentralized finance networks remains high. If we can't find a way to improve transparency and compliance for DeFi, it will remain difficult for honest taxpayers to pay what they owe. And DeFi will be a favored tool for tax evasion and illicit finance. Thank you for the opportunity to testify, and I look forward to your questions.

Thank you. We'll now proceed to the question and answer session. Many participants in the digital asset market are not large financial institutions or wealthy entrepreneurs holding digital assets for sophisticated investment purposes. They are everyday Americans. Digital assets can provide a low-fee alternative for Americans to access payment systems, savings, and investments without high fees, credit credit checks or or deposit minimums. Digital assets can also provide instant payment for small business owners at a fraction of the cost of traditional checks, or wire transfers, or even traditional credit card fees. The Coinbase Institute has data that suggest one in five American adults own crypto, and seventy percent of owners make less than a hundred thousand dollars per year. Mister Slotkin, when it comes to tax policy, this committee has prior prioritized everyday working Americans. How how do the reforms that we are considering benefit working families, and what are some of the key challenges that they face that these bills address?

Uh, thank you, Mister Smith, for the question. Um, so, uh, there are a number of provisions, um, in the legislation I think that benefit, uh, small taxpayers and small businesses. You mentioned, stable coins stable coins are innovative they're a transformative uh method of payment and they have the ability to essentially create much more efficiency for the entire payment structure so a small merchant for example can use them more much more effectively than existing systems um so i think stable coins are a good example of that we have de minimis rules uh that are in the proposed legislation the de minimis rules take away a lot of the clutter a lot of we heard a lot about record keeping about the ability the need for that and i think that alone um solves a lot of problems. We have an alternative mechanism for calculating gain or loss, which benefits small taxpayers for small persons who can use that for their businesses, so that essentially cryptocurrency is accessible for just about everyone. So I think the I think the great uh aspect about the legislation itself is it has a number of provisions that simplify, reduce clutter, and promote the use of cryptocurrency for the efficiencies that I think they were intended.

Thank you. Financial markets need need clear rules of the road. To make it easier for Americans to access digital assets, we must provide greater tax clarity for those who make these networks run. This includes individuals who engage in mining or staking to validate the blockchain and are rewarded for that work with newly minted digital assets. Certainty is also important to ensure America remains the global digital asset leader, and encourage foreign participation in our domestic markets. Mister, how confusing is the current tax treatment of mining and staking rewards for the individual taxpayers involved? And how will addressing issues like timing and sourcing of the income derived from mining and staking enhance the ability of the US to remain the crypto capital of the world?

for i i think in my written testimony i cited to a survey that related to the confusion that users of uh crack at one of the large exchanges in this environment uh face when dealing with taxes and it was something along the lines of like eighty nine percent of individuals reported some level of confusion and a large portion of that was related to how to manage something like a staking reward um so i think fundamentally you have uh a very large subset of the population that is interacting with these um technologies that that have expressed this frustration and this confusion and I think um the bill as proposed does a really important job of not just clarifying how that's going to be treated for them but recognizing that that treatment aligns with what an individual who is using this technology probably assumes when they are performing a validation technique just for a little context a user who might be a solo staker on the network meaning they just want to participate in the validation process to support the ability for everybody to track uh to transact peer-to-peer uh is you know essentially just interacting with their computer in uh the same way that a lot of us would interact with an app on our phone as I as I mentioned in my opening statement and for them the idea that newly generated tokens that are coming from no one there is no one that is paying them there is no you know compensator that is on the other side uh should be taxed right at the moment that they receive them is kind of contrary to what you would imagine in similar circumstances. You know, take for example an athlete who signs an autograph to a piece of, you know, like a book that they're writing. Well, they don't assume that the moment that they put their autograph to that, even if it is more valuable out on the market, that they now owe taxes on that, right? The creation of that value is done by the staker and recognizing that with the the the legislation in the way that it does is very important.

We must ensure that the IRS can administer and enforce tax laws while not imposing undue reporting burdens on taxpayers complying with the law. Right now, the current system is a far cry from that. It's it's estimated the IRS last year alone received hundreds of millions of form ten ninety-nine DAs for digital asset transactions that taxpayers are already required to report on their tax return. Even though up to half were for for amount less than ten dollars, the current system creates an immense burden for taxpayers and the IRS with little tax revenue to show for it. Miss Riley, how does this flood of tax filings and paperwork impact not just not just brokers or IRS personnel but those participating in the digital asset market, and how and how do

Uh, thank you for the question, Chairman Smith. Um, I think one one thing I'd like to focus on is that just beyond, um, your general crypto transactions, as blockchain technology proliferates, you have an increasing amount of even just general financial activity happening on blockchain as an alternative to the traditional rails of finance. So transfers of tokenized securities, transfers of stable coin, they all trigger these micro-transactions of transaction fees, which results in voluminous tax reporting to taxpayers that may not even fully comprehend why they are getting tax reporting for, you know, they're they're imagining, oh, I'm transferring a tokenized security, but I'm also getting this micro-transaction with minimal gain or loss as well. So it adds a level of complexity um and challenges on the administrative side. Um, in the - the proposed bill, um, the - um, exemption for transaction fees under ten dollars eliminates a lot of the noise and the friction um that occurs in this space for um with very, you know, little impact to tax revenues, especially with the preservation of the unrecognized gain um that goes into tracking.

Thank you. Digital assets do not necessarily fit into existing rules and regulations. In in some parts of the tax code, standard definitions um simply do not apply,

Mm-hmm.

while in other parts the application of the law to digital assets is is unclear or confusing. For the sake of simplicity for taxpayers, we should be looking at how to bring digital assets underneath the umbrella of existing tax law. Mister Kircher, how would you look um to using existing rules, um, governing traditional financial assets and how and how do the policies we are considering today on like charitable giving or access to US markets for for foreigners foreigners help individuals and entities find um balance between digital assets and and similar financial assets.

I think that's a great question and thank you, Chairman Smith, for it. Um, focusing on the charitables, uh, concept that you were mentioning. I think the bill takes a really thoughtful approach, right? For the largest digital assets, the ones that are widely traded, you are able to use a spot price under your bill in order to value for charitable donation purposes. That's way simpler than the current rule where you actually have to get an appraisal. And that appraisal system is not ideal for widely held digital assets, A, because the appraisal is costly, but B, because it's subject to potential risk of abuse. Um, as you

Thank you, sir. Thank you, sir. I now recognize the ranking member for any questions. I now recognize the ranking member, for any questions.

Uh, thank you, Chairman, I'm pleased that you noted the fact that there are ambiguities that we would like to use our panelists to help uh clear up. So, Mr. Ketcher, in reading your testimony, uh, if you don't mind, I wanna ask you, as you spent some time on some of the allotted questions that we have, you pointed out that providing that those who receive staking rewards with the ability to defer recognizing income on those rewards has the potential to create real imbalance in our financial system. You explain in more detail on how this tax advantage could potentially encourage people to move their money out of traditional banks and into cryptocurrency, consistent with the discussion we've had here clearly about establishing rules of the road.

Thank you, Ranking Member Neal. It's a great question. I already mentioned the kind of example of a high-yield savings account, and how deferral would put, um, digital assets on a better footing than a high yield savings account, so that's one kind of issue, but imagine that your investor's saving up for retirement, housing, whatever, and you're thinking about say corporate stocks or bonds, right? If you get dividends from a corporate stock, that's taxable when received, if you get interest from a corporate, or if you get interest from a corporate bond that's taxable when received, if you get dividends from corporate stock, that's also taxable when received.

Yeah.

Deferral would be a better treatment than either of those, and would tend to push people from traditional financial instruments into digital assets ones. And as you know better than anybody, the tax rules can really shift markets and tell people kind of where they should and shouldn't invest.

Mm-hmm. So the follow-up just to uh, as you've noted, I think one of the biggest concerns I've had, which have been shared with the panelists in the past, uh, we've done some really good work on this committee with retirement savings. And I think being mindful of exposure to anything that might be disruptive, has to be done with the greatest of care. And I I point that out largely because we're living longer, we wanna live better, and I think in the retirement space alone that a lot of scrutiny has to go into the conversations and suggestions that are emanating from not just the testimony of our panelists today, but from some of the points that our members have made. And if you think that people are angry, given the savings in loans, issue or the issue of the collapse of Wall Street in two O eight, my God, if this isn't done with great delicacy, you'd be looking at a revolution. So that's the point that I wanna make, Mr. Chairman.

Thank you, Ranking Member. Uh, Mr. Smith.

Thank you, Mr. Chairman, and certainly thank you to our witnesses as well. Uh, obviously this is a complex and rapidly evolving area, uh, a significant portion of our these days and we know that while technology is changing, one point is certainly clear and that's Congress cannot afford to ignore developments occurring before our very eyes. As policymakers our responsibility is not to pick winners and losers, but to provide clear rules, promote compliance, and ensure American innovation can thrive here at home. I appreciate our witnesses joining us here today in helping the committee better understand industry priorities challenges facing taxpayers, and opportunities to improve our tax code. This committee has seen firsthand how tax policy affects American competitiveness. Before an actamant of the Tax Cuts and Jobs Act, the United States remained one of the highest corporate tax rates in the developed world, while other countries adopted competitive tax regimes. I'd like to point out that even President Obama recognized that our rate needed to be modernized to stop ca- capital formation in jobs from being offshore. Congress acted, we modernized our tax code, improved competitiveness, and corporate inversions largely disappeared. There is an important lesson in that experience. Innovation does not stand still while policymakers debate. Capital, talent, and investment gravitate toward jurisdictions offering certainty and stability. Today, digital assets present a similar challenge. Regardless of one's view of cryptocurrency or blockchain technology, these innovations are likely to remain a p- to remain part of our economy and become more integrated into everyday commerce. Entrepreneurs, developers, investors, and users need clear rules of the road. When uncertainty persists, investment moves elsewhere. The U. S. already leads the world in capital markets, financial innovation, entrepreneurship, and technological development. We possess the infrastructure, talent, and investment ecosystem necessary to remain the global leader in digital assets, as well. I appreciate President Trump's commitment to maintaining American leadership in this sector and Congress has an important role to play. Our goal should be simple, establish clear, workable tax rules, encourage compliance, promote innovation, and ensure digital asset investment jobs and infrastructure continue to be built in the U. S. rather than elsewhere. I look forward to hearing from our witnesses today in discussing how Congress can provide certainty for taxpayers while strengthening America's position as the world's leader in digital asset innovation. Ms. Riley, I, uh, was, I've noticed then and please the Tax Clarity for Mining and Staking Act would establish clear sourcing rules for staking rewards, uh, potentially onshoring significant staking activity back to the US. This simple fix in the tax code will go a long way in driving growth for US crypto, bolstering the tax base, and making crypto safe for four users. I was wondering if you could explain the benefits of establishing clear sourcing rules for staking rewards in order to attract more staking activity here at home.

Uh, thank you, Congressman, for the question. Yeah, I think sourcing has been a critical, um, area of ambiguity with, um, validation rewards generally. Under the existing tax principles, it's unclear exactly how you would source them, and that uncertainty has been incentivizing offshoring of, uh, much of the infrastructure for, um, staking and validating. Having a rule such as in, um, the Tax Clarity for Mining and Staking Act, um, provides clarity that the income should be sourced to the resident of the recipient. Um, that ensures that US staking providers can be on a level playing field with non-US, um, staking providers, such that the income is sourced to the resident of the recipient, regardless of where the infrastructure is located. Sourcing rules need to be based on factors that can be in both clear and administrable, and also not easily manipulable. And having them, um, be based on things such as location of the validator, um, results in significantly different tax outcomes based on immaterial differences.

OK, when you say not easily manipulable, I think I said that right. Uh, can can you say what, uh, we should maybe focus on there?

Uh, I think there it's basically removing the, you know, it shouldn't be based on where exactly the validators are located, where the people are located. Those are things given in the cloud environment can be easily moved offshore. Um, and we already see that happening, uh, where staking providers can move their infrastructure offshore. They can shift that, um, you know, validation activity offshore. And, sorry.

So public policy-wise, uh, your, your priority, uh, would be what?

Would be to source, um, if by sourcing to the residence of the recipient, there's a clear rule that you can identify the, um, jurisdiction for tax more easily and not have to go through a facts and circumstances

Great. Thank you very much. I yield back. Mister Dargat.

Uh, thank you. Mister Karcher, uh, am I correct from your testimony that the, uh, mining and staking legislation before us does not even the playing field for crypto, but it gives it special tax advantages.

That's right. Under current law as affirmed by the tax court last week, those rewards are taxable and earned.

And is there any doubt that, as you pointed out, not just this legislation, but combined with the Clarity Act, uh legislation that the crypto industry has invested literally tens of millions of dollars to gain approval for, uh that uh the goal is to strengthen and expand the crypto industry.

I can't speak to the goals, but I can say that that would be the effect.

The effect, OK. And as far as effects, uh your written testimony lays out how the legislation that's before us could set up another multi-billion dollar taxpayer bailout of the type we had a few years ago that I opposed. Uh, would you just walk us through how crypto could become kryptonite for our economy?

I think one thing for policymakers to consider on this is that if digital assets become a larger part of retirement accounts and the assets remain highly volatile, or in a worst-case scenario crash, that would have an enormous impact on households' retirement savings. And if that were to happen, I think policymakers would have to think about whether

As you know, uh, one of the, uh, big players after having condemned crypto years ago in crypto is President Trump and the Trump family. Uh, the Wall Street Journal has indicated that World Liberty Financial, just one of the family's crypto ventures, has put at least, uh, one point two billion dollars in cash into the Trump family's pockets in the last sixteen months. And Eric Trump, of course, has American Bitcoin, a Bitcoin mining company that had a thirteen billion dollar evaluation when it went public. Uh, Mister Karchner, is it true that one of the bills before us would let a company like American Bitcoin and the Trump family members who own it, in essence, to defer their taxes indefinitely?

That's right.

Uh, and uh, does this provision uh that you've discussed Uh, as far as illicit finance, uh, what we know to have been the experience with, uh, Bitcoin, uh, Binance, I guess, uh, allegedly having helped, uh, Hamas, Hezbollah, Iran's Revolutionary Guard, and others move so much money, a billion dollars, I believe, uh, in across its platform, tens of millions to it after October seventh itself.

That's right.

That's right. Uh, so uh with reference to any of these, we got seven, eight bills before us. Does a single one of them do anything to reduce the danger of illicit transactions and more misuse by Iran, Hamas, Hezbollah uh in uh uh misusing these accounts and avoiding any accountability?

I don't think that anything in this bill would improve safeguards and guardrails on that level. I think that's something the policymakers should consider as the legislation progresses.

Well, uh, you would think that in the long months of this that some consideration would have been given to it. Uh, would strong tax reporting requirements help the IRS and law enforcement clamp down on this illicit activity, including uh, illicit activity not only by terrorists and criminals, But just your common ordinary tax evasion of the type we have uh had alleged against uh President Trump himself.

Yeah, tax reporting and collection can absolutely uh reduce the risks of tax evasion or illicit activities. Um, and I think that there's more to be done here.

And can that be accomplished in a fairly straightforward way so as not to encumber any of those who uh believe in crypto?

There's certainly precedent for it in traditional finance. We already have rules that do just that. Uh, I think that you would need to think about whether they fit the decentralized finance framework, but I don't think it's fatal, I think it's workable, you just need to figure it out in a slightly different way.

Thank you very much for your testimony. I yield back.

Thank you, Mr. Kelly.

Thank you, Chairman, and and thanks our panel for all being here today. I don't think there's anything more confusing than what we're trying to transfer in and what how the currency works from the day. People started trading livestock for something else, and we got on and on and on, and now we've gone through this currency thing. One of my questions is, or the piece that I have, is an amendment uh to the nineteen eighty six code, it's forty years ago, when it comes to charitable giving, and the exemption for people on charitable giving when they use this type of currency to to trade it. So,

No, I'm not gonna make it.

um, and I and I'll be the first one to tell you um, I have been uh,

Shandryn.

mystified now for quite some time, as to the creation of this the birth of this whole idea, we have a new currency to deal with. Uh, but the question is always gonna come from the government is how do we tax it? How do we figure this out? How do we get a tax? Mister Zlotkin, can I ask you, from the perspective of charities and donors, does the current appraisal requirement, on top of the current appraisal requirement, create a meaningful barrier to charitable giving? And would the framework proposed by the committee help address that challenge? And before you answer that, when we did the original, Tax Cuts and Jobs Act, I can remember one of our members coming in and talking and say, you know what, we've gotta be careful what we're talking about when it comes to this charitable, because I got a lot of people who I'm, who I represent are questioning the fact why should they continue to make charitable donations if there's gonna be a tax inference to that. And he answered, well that really shouldn't bother people, if they really wanna give to a charity it shouldn't matter. And he said, really? Watch the numbers go down and then tell me it doesn't have an effect. So if you could, Mister Slott, because I think this is a very confusing thing, if you can bring some light to it, what can we do? What would the framework proposed by the committee help do to help uh challenge that? I mean we have to figure out what we're gonna do with it and how we're gonna tax it, or not tax it, or how we're what we're gonna do.

Uh, thank you for the question, Congressman. Um, I think uh the bill, first of all, th- I think one of the things we've argued very strenuously is for parity with the rest of financial services that this industry is two trillion dollars and we need rules of the road we need some clarity associated with that one of the aspects of that happens to be charitable uh giving and charitable um donations. Right now, if an asset is publicly traded with great frequency on a public exchange like Coinbase, and you can get market data instantly from your phone, you still need an appraisal to give that to charity. That is an inherent impediment to charitable giving, if you have to go in and hire someone to do something that you can just essentially establish on your phone. So one of the great advantages of of the bill, actually, is that it introduces parity with publicly traded stocks and, uh, publicly tr- market- it's widely traded digital

I I agree with you on that. Yeah, I I agree with you on that. I I think if we make it more complicated for people to be charitable, I I think if we make it more complicated for people to be charitable we're missing the whole point of being in America. So I appreciate you all being here today. This is a very, as we transition and go into this, uh, some people understand this very clearly. But I'm looking at it strictly now from a charitable standpoint, if you have an asset that you can donate and and make sure that the charity benefits from it I don't know why we'd have to go through this other process. So I appreciate your answer on that and as we go forward uh we're gonna have a lot more discussions of these I'm sure. Uh this is not the the way we're all used to things going happening but I'm sure this happened also. in in prior times when people tried to figure out how this is working and how does currency work or the lack of currency or what it is that we do and so if you have something that's valuable and you wanna help a charity why not be able to do it without having to do this whole process so I appreciate you all being here today for helping on something that's I think as we transition to it uh we'll get more used to it we'll get able to look at it more the way we look at other other assets so thank you so much.

Gentlemen Yales, Mr. Thompson, you're recognized.

Thank you uh, Mr. Chairman. This is an important hearing and I'm glad that we're uh we're doing this. Uh these are critical issues and we need to make sure we get it right. And I really wanna associate myself to the comments of Ranking Member Neal especially on the liability issue uh we'll probably be going back and forth on the tax side of things for as long as any of us are here. But uh on the liability issue that that's gonna be uh critical. And uh we need to really make sure uh we and don't leave the taxpayers uh holding anybody's uh bag. Uh uh, Mister Karcher, I I was reading through the testimony and I uh was particularly interested in the tax tr- uh treatment of mining and staking awards, is uh seems to be a real sticking point in in all this. And it seems that maybe we're at a impasse on where we go and how these uh issues are viewed. Uh, some folks are telling us that mining and

Thank you, Mr. Thompson. Thank you, Mr. Thompson. It's a really good and important question. It's a really important question. This has really become a little bit of This has really become a little bit of a battle of analogies right? But let's step back for a moment and talk about what's really happening with these transactions. So minors and stakers, the validators who are receiving those rewards, what they're getting rewarded for is not for solving a complicated math problem in the case of mining, or for putting up their staked crypto in the case of staking. They're getting paid in order to update the digital ledger to record who owns what. So it's really a payment for service when you think about what's happening here. That's not like harvesting your own crops or selling your own chair that you made as a furniture maker. And that I think is crystal clear in the tax court's uh holding from last week. I think an important part about that case is the tax court decided to issue that as a tax court memo. That format is normally reserved for cases where the current law is extremely clear and well settled. And so they didn't seem to think that there was a lot of ambiguity here, uh, and neither do I. We have argued at the tax law center for many years that the current

Thank you very much. Um, Mr. Chairman, I'll yield back.

I wanna thank the witnesses for being here today, and uh this is a very important topic as the chairman said, and you know, as we work towards solutions here, I think we have to figure out uh a consensus on the tax rules for the digit digital asset industry and Some members of this committee might view the digital asset industry and the blockchain as the next technological breakthrough for the financial services industry, and some might view it as a complete Ponzi scheme, and maybe there are opinions somewhere in between. But regardless of opinion about the industry or the asset it produces, it should not preclude this committee from writing clear tax rules. For an industry that has the same global market capitalization as Amazon. One of the major flaws in the c- the c- current digital asset environment is the requirement for separate reporting for every transaction no matter how small or routine. This burdensome for taxpayers and administratively inefficient for the IRS has left many taxpayers brokers and the IRS spending dollars to track pennies. Mister Zlotkin, uh, I understand Coinbase is the stakeholder that struggles with these same issues. Uh, I think we've discussed this, you know, millions of tax records, for very small amounts. How do you think the bills we are considering today help address this issue?

Uh, thank you Congressman for the question. I think the bills go a long way towards solving that problem. Um, and they reduce a lot of clutter for the system and allow the IRS to focus on what it should be focused on, which are large transactions that produce lots of income. So if you look at Coinbase, and I've said this repeatedly, probably half of our actual submissions on ten and nine DAs are for transactions that are less than a hundred dollars. So, and now we're talking about eight hundred million, eight hundred million transactions that we force the IRS to ingest through data. So, the bills, to the extent that they eliminate stable coin reporting, which is probably half of that amount, and they provide it a minimalist role for ga- what we call gas fees or transaction fees, that's the bulk of what I'm talking about. So, I think just by doing that alone reduces the enormous amount of clutter that the IRS faces and allows again as I said the IRS to focus on the bigger picture.

So I I think what you're referencing is something that we talk about often here, is the inefficiency or the inefficiencies of the IRS. And clearly if we can reduce that burden, uh it's it's we're not going to stop the use of cryptocurrency in the United States Congress. I mean that's not what we're here to talk about. We're talking about how to tax these transactions, whether they be classified as currency or property. And so if the IRS is having to monitor these, if we can com uh create a de minimis situation where there are literally millions and or transactions that are not having to be monitored by the R S, we're gonna free them up to do other things that they're uh rightly should be doing with the with the technology and the people they have. Uh, I think another issue we're aware of as it relates to the taxation of mining and staking boards is timing. And another issue, however, is sourcing issue. And I think we talked about this a few minutes ago. In the Tax Clarity for Mining and Staking Act, the source of income from newly minted digital assets is based on the resident or the recipient at the time when the income is included. For each of you on the panel here, and you bring a lot of knowledge in this space, you do think this is the right approach for the sourcing perspective? If you can give us a simple yes or no, that's great. If you wanna elaborate, we can maybe in just a second, but Miss Riley.

Sure, yes, and I think any other policy would continue to incentivize offshoring of validation activity and would also adversely affect US competitiveness.

Mr. Zolotkin.

Yeah, I totally endorse that, and I think we've for that for a while. In fact, we've gone to the IRS and sought ruling on this very point. The simple fact is that if, and this really is attracting foreign investment into the country, we want foreigners to be able to stake on US platforms. Right now, if a foreigner wants to stake on the Coinbase platform, we have to essentially tell them that everything that's done for that staking validation mechanism is done offshore with offshore infrastructure, with offshore people, with offshore aspects of Coinbase. The reason being that they don't want any entanglement with the United States. What this source rule does,

Mister Samasato.

Yeah, I would agree with the comments of the earlier witnesses.

OK. Mister Kercher.

The residency-based rule would, I think, make the rules much clearer. Um, there are different approaches to this and there are trade-offs among them. Would be happy to follow up with you or your staff, uh, on those trade-offs and different approaches.

Um, one one last question here, brokers and dealers of securities and commodities can use the current mark-to-market accounting method and no current option is generally available for brokers or dealers of digital assets that's why the PAR Act uh aims to provide parity between digital assets and other traditional assets by allowing digital asset dealers and traders to utilize mark-to-market accounting. Mister Zlotkin, Mister Samasato, does extending the mark-to-market accounting dealers or traders of digital assets make sense to you?

Uh, yes, I think, again, the the bill is named parity. I think parity was something we've also argued for rather strenuously over the many years. Parity with financial services, so we don't create an advantage for one industry versus the other is extremely important. So allowing mark-to-market, um, and also, uh, there are other aspects of parity, including securities lending, uh, various aspects that create parity of various rules, increased liquidity, and acknowledge the strength of this industry. I think all those go a long way towards helping and and do a look very

So, Simon Sato.

Yeah, I would just add that I wouldn't limit it to uh traders and dealers. Truthfully, the nature of how this technology works is that people can make uh numerous transactions in a small period of time and uh one of the parts of Mister Yakim's bill would consider a kind of a similar accounting method as it applies to individuals who are involved in a high frequency of transactions and I think that makes a lot of sense particularly from an administrability perspective.

Mister Larson, you're recognized.

Uh, thank you, Mr. Chairman. I want to commend everyone for uh their testimony and also for the uh bringing up this uh extraordinary uh concept. Um I don't know how many Americans are, you know, totally comfortable with this, but I what I'd like to start is uh it's impressive to read what all of you had to to say is how comfortable do you feel with Congress making a decision?

I'm happy to jump in there.

This Friday?

Uh,

Yeah.

I was just gonna I think in the alternative, the the question is what does the alternative look like right now? And as uh individuals who

So if you're at Augie and Reyes, what does the uh alternative look like?

I I can tell you from personal experience and from anecdotal experience with lots of people who participate in these networks, it's it's pretty nightmarish. It's uh nightmarish.

It's pretty what? OK.

Um, you know, you are you can engage with these networks in a variety of ways. Uh, we often talk about the ability to make payments in a peer-to-peer manner, but, uh, there's also the possibility to post social media posts that require paying a small amount of transactions. There's video games that are associated with digital assets. All of that activity comes out to the end of the year, a huge long list of transactions that the average taxpayer who's doing this kind of in a personal capacity.

So, do you, do you, uh, feel that Congress is equipped and has enough knowledge and information to act accordingly?

I think for some of these targeted pieces that we're talking about today. There's been a lot of discussion over the years. We've put together a sixty page report after a sixty page report on a lot of these concepts. And so I wouldn't, you know, necessarily say we need to change the whole tax code.

With all due respect to the sixty page reports, I'm sure they're thorough, et cetera. That's not what I'm asking. Do you think that people in the country, et cetera. I think this is an important issue, and I think that, uh, your remarks and testimony, whether it's sixty pages or six hundred, Uh, they certainly raised a lot of questions. I think the uh, Mister Neal raised uh probably the most critical one, but I I I'm I'm curious, Mister Slotkin, do you w- how what's your take on this?

I think it's incumbent upon Congress to do something. I think we need rules.

So you think it's it's that urgent that we act now?

It's a two trillion dollar economy that has very few rules.

Right. So, and the urgency is

Right.

again, I'm talking to a guy at Augie and Reyes in East Hartford, so what's the urgency for him to

act. The fact that he may not know the rules of how to under the how to report income, he may not have know the rules

So a guy who's trying to make ends meet in this economy, et cetera, he feels that sense of urgency about uh this uh and uh that if Congress does an act to say, well, protective social security as opposed to this, you think that that's more urgent?

I don't think it's a choice between social security and text policy.

What's it a choice between?

Text pol- I think text policy is extremely and and The this technology also serves the underserved,

Complex.

like people who are not banked, who can actually therefore not pay enormously big gas fee-

So I guess the point I'm getting at is trying to convince the

Yeah.

public as is going to be the case in trying to convince Congress about the urgency and what are the underlying uh safeguards, et cetera. And all of you I think are very bright and capable. Miss, Miss Riley, what a- what about yourself?

I think just to reiterate some of the other points, I I think that we're existing without a w- you know, a full comp- tax framework, and I think this increases abuse, which can reduce compliance, which does harm the FISC. I think that by having rules you can increase compliance, so it would affect everyday taxpayers in that you want people paying their fair share. Tax fairness is very important, and you need a workable tax framework to achieve that.

Mister Carcher.

Here you're taking two incredibly complicated topics and kind of smooshing them together, right? You've got digital assets, very complicated, and a lot of education that needs to happen, and then text, right? Also very complicated with a lot of interactive effects that are sometimes intuitive. And so I think that there is a really important factor of making sure that the members are educated and really understand what they're doing before acting.

And probably the most important thing is that we get it right. Right? And so, uh, I think, uh, I think there's kind of a consensus building around this that, um, it's an important industry, it certainly, there is a sense of urgency, but there's also a sense of are we acting too quick without knowing what we're doing? And, uh, when I say we, I'm not talking about you. I'm talking about the United States Congress, who represents, uh, the public. So, uh, uh, I guess, uh, color me, uh, uh, I think this is a promising industry with a lot of it, but the - the - there's far more questions than there seem to be answers to that give you the confidence that we've got it right just yet. And this is a lot of good work done in these bills is - as well, but I think it's gonna take a lot of, uh, public her- hearings and further hashing out. You're back.

I know it would shock the gentlemen to say I applaud our chairman for starting this this bipartisan task to uh try to figure it out, because I think there's I think your original question was a great question, is Congress prepared?

Right.

And the answer's probably not yet. Not yet. Uh, Miss Miller.

Thank you, Mr. Chairman. And I do want to thank Chairman Smith for calling this legislative hearing. And I want to thank you all for being here. to discuss the important issues. The digital asset market has grown rapidly over the last several years, and we are at a crucial moment where tax clarity is needed to ensure that the United States remains the crypto capital of the world. Without a clear administrable tax code, digital assets will be pushed offshore and give advantage to foreign adversaries and weaken our financial stability. As the digital asset market continues to grow, more and more taxpayers have entered this space. However, due to confusion, ambiguity, lack of clarity, as highlighted today, some digital asset owners may have underpaid taxes due. These taxpayers may be afraid to come forward and report their mistakes, fearing that the IRS may impose harsh penalties on what was otherwise well-intentioned activity. or maybe even regret those less well-intentioned activities that they're coming forward and willing to pay what they're due is to start having a clean slate. That is why the Digital Assets Voluntary Disclosure Program Act would direct the treasury to provide a voluntary disclosure program for taxpayers who failed to comply with tax laws related to digital assets, to come back into compliance, as well as providing reduced penalties and a clean slate in the process. Mister Salmansato, do you think that taxpayers could benefit from a program like this, given the lack of clarity regarding the taxation of digital assets in the recent years?

Yes, Congresswoman, um, I think crypto-tax has evolved over the years through notices and FAQs and enforcement actions. And so going to the the gentleman's questions earlier, it puts the individual taxpayer in a very difficult position of people who are already engaging in this technology and want to engage in it. And uh I think from the perspective of trying to bring the clarity that people are talking about here today, uh and and provide that framework that'll allow people to proceed forward, it necessarily needs to come with an understanding of what the last decade plus has looked like for a lot of individual taxpayers. And so I think that voluntary disclosure program is really important. I guess I would even add, too, i- i- and this is nece- not necessarily part of the bill, but the opposite is true, too. For those of us who are, like, nervous about the tax consequences of what we do, I'm sure there's tons of us who have put everything at a zero basis because we have no idea really what we're looking at or when we're gonna potentially and so, um, you know, Creating that level playing field for everybody and also allowing the consequences, you know, understanding the nature of the consequences from before uh a period where Congress has been clear about what it wants is really important.

Thank you. It is clear that the status quo is burdensome and confusing for the digital asset industry. And without legislation, the problems will only continue. I am looking forward to continuing to work on this these issues with my colleagues to ensure that tax clarity and parity allows the United States to remain the global leader. But we all will have a lot of questions moving forward. I thank you and I yield back.

Mr. Davis, you're recognized.

Thank you, thank you, Mr. Chairman, and thanks to all of our witnesses. Mr. Katjer, welcome back to Waze Beach. You know, as my constituents are struggling under the Trump-inflicted crushing cost of higher rent, health care, food, gas, and goods. I question the appropriateness of gifting hundreds of billions of dollars in costly tax breaks to industry firms and wealthy crypto holders. As the President creates a one point eight billion dollar to give to January six rioters and now he's trying to take over all federal grants to gift his friends and wealthy buddies billions more in taxpayer dollars. I'm frankly shocked that our committee is once again seeking to gift billions in tax cuts for the wealthy. I understand the need to create meaningful roofs of the road that put different create parity among similar assets. But in my estimation, the bills before us today failed to help work in families while giving billions in tax breaks and loopholes without the necessary guardrails to prevent abuse, all the while privileging digital assets over other types of assets. So, Mr. Ketcher, could you talk about the most important guardrails for digital assets in this tax space? That is, guardrails to protect consumers, prevent abuse, and promote parity among similar o- other kinds of assets.

Thank you, Mr. Davis. I would probably focus on three things. The first is, don't create unintended subsidies that will push people away from traditional financial investments. into digital assets, you really do want true parity. I think the second thing I would say is you should extend uh anti-abuse frameworks from traditional finance onto digital assets as appropriate. You see that in some of these bills with the wash sale and constructive sale rules. And then the last thing I would say is I think there's worth study on the digital asset or crypto tax gap. Um a lot of crypto is now subject to information reporting that is really helping taxpayers in the irs more easily find the right answer there's simplification can be done but in general the structure works um there's a huge slug of digital assets that still do not have any transparency or reporting the problem with that is that without any kind of reporting uh based on prior research in other spaces you should probably expect less than half the tax paid or less than half the tax owed to be paid so you should expect compliance below fifty percent or right around there uh without something in this space so i think that's really

Let me ask, do we see a great deal of risk for the average consumer, the average working family? What - what does this really mean for them?

I think your average consumer or family, still even today, despite the growth of the industry, doesn't have investments in this area and so aren't really directly affected. there certainly are families who do, uh the industry has grown quite a bit. Regardless of whether you're invested in this space or not though, if there are subsidies that get built into this law, including deferral, that is something that all taxpayers have to pay for, right? Deferral isn't free. We have to borrow today to pay for any deferred taxes owed tomorrow. And so I think that's something really important. You might be somebody who's not even in this industry, but if deferral or something like that that is an improper subsidy would happen, there's a question of who pays for that, and I think it can be. uh, consumers and - and families.

Is there much likelihood that any of their assets might get entangled and they end up losing?

If you encourage through subsidies the investment in digital assets, and the economy go- or and that part of the industry goes poorly, absolutely there are risks there.

Thank you. Now you're back, Mr. Chairman.

Thank you, Mister Schweikart.

Um, thank you, Mr. Chairman. I apologize for my tardiness. We're down the hall actually arguing over water. Can you imagine that being from Arizona? Um, uh, uh, my question is actually one of the bills here is actually trying to sort of, um, have a discussion on de minimis. You know, what what would actually make it in parity to traditional finance? Um, do any of you actually feel you have a level of expertise or comfort to walk through a quick discussion on the de minimis language we have? Raise your hand, let me know. All right. Uh, discuss it with me. Um, so if I have my network fees and those things within this, um, I'd had de minimis bills in the past, uh, agreed they might have been hyper simple. Um, what would you do? Are we going in the right direction?

I think you're definitely going in the right direction. I think the areas of stable coins and gas payments that have already been identified are important areas, uh, where a de minimis exemption would work. I think, um, understanding the purpose of a de minimis exemption is really important. It's not a means to say, hey, we're gonna ease the tax compliance requirements on you. I think an important concept that somebody else told me is the tax regime needs to meet the taxpayer where they are at. And right now you have many people making very small transactions involving cryptocurrency. And the over-criminalization of that activity, if you don't pay it right, creates an environment in which everybody is a tax cheat. And so

Yeah, and and you also have the problem of just just even if, even if it wasn't about that, it just compliance cost becomes

That's exactly right. And so,

the

taking from the concept of like a foreign currency transaction, it wasn't that we wanted to say, hey, we're incentivizing people to go buy Euros and then buy a croissant when they go to, you know, France and they're tran- It is a recognition that when people traded into Euros, and then went on vacation and bought something, we could not expect them to do that capital gains estimation and pay those taxes and that they weren't going to. And I think that is why we think at least that the de minimis exemption should go further to cover some of these assets like Bitcoin where there is a very real economy for using it in small pan

OK. So you make the distinction between stable Bitcoin and um the network fee?

Correct.

OK. Anyone else have an opinion on this? Yes, sir.

Uh, I strongly endorse that. Uh, I also would say, so if you look at one spectrum, stable coins are right now subject to tax, they're treated as digital assets, disposition, use of them is in in impeded by virtue of that. There's no gain or loss associated with that. A substantial amount of reporting, both by consumers, by retail users, and by us as a broker have to be reported that way, as though those are taxable transactions. When you do that, you prevent the potential growth of stable coins as an enormously powerful payment instrument. That essentially provides average consumers a much more effective means,

Mm-hmm.

with fewer costs, including fewer costs for less advantage to be able to, uh, who don't have access to the banking system. So you have that. A lot of our industry is based on gas fees, network fees. They're less than ten dollars or often less than one dollar. Those also have to be reported. So we're, we're essentially transferring a lot of focus, attention of the internal revenue service on something that is not gonna generate much taxable revenue and impedes our growth overall.

And, okay, you basically went where I went. Um, I have an somewhat of a concern that does, is our language robust enough to make it clear that we don't wanna create a lot of noise? And so often we've actually had this thing where we're getting lots and lots and lots, and lots of data, and there's really no tax collection benefit to it and in many ways if there's bad acts it gets lost in that much noise. Um, also I wanna make sure, Mister Chairman, as we design this, i- if there's a value, a reduction of friction in being able to use the technology for transactions, therefore eventually lowering costs to consumers and to the retailer, I want that, because I actually believe if there's lots of these transactions, Sorry, your network fees, those things will actually be competed down. And so that's just why I've always had a little fixation here on what we call de minimis, is if it doesn't bring us tax dollars, let's make it as efficient as possible and there's some ways to design leakage and anti-fraud protection. And with that I'll yield back, Mr. Chairman.

Thank you. Ms. Sanchez.

Thank you, Mr. Chairman, I appreciate the opportunity for all of us to talk about crafting a new tax treatment. for digital assets. And while there are some provision in in these bills that I think make sense, I do wanna express my concern about one proposal, which is the unlimited deferral for newly minted digital assets. As everyone here knows, these assets are becoming more popular in the US economy, with nearly one in eight Americans holding some form of digital tokens. But we have a unique opportunity here to create a new tax treatment for a new type of asset, and I really don't wanna do that with inequities that are built in. As we've seen time and time again, wealthy taxpayers can use loopholes to enrich themselves. To that end, I would like to see some of these bills, um, incorporate changes before they go forward to a mark-up. Um, Mister Karcher, you spoke in your testimony about how deferral violates parity, with other industries. Could you talk a little bit about what problems you foresee that unlimited deferral for mining and staking would create?

That's a great question. I think unlimited deferral is particularly at risk of being pernicious, because of how the rest of our tax system works. So if you were able to um hold on to digital assets that were earned until death, and then pass them on and get stepped up that's not deferral anymore, that's elimination of tax. Now the bills today have guardrails against that, they would say when you get rid of dispose of your assets, uh they would be taxed at that point. Um I think the bill language solves some of the transfer at that stuff, but not completely uh because if you were to earn uh the rewards through an entity, like a partnership uh and that partnership that can then gets held off to your kids, I'm not sure that the bill text actually prevents kind of game playing to again convert deferral into elimination of tax permanently.

Thank you, I appreciate your answer. Um, I know that we've talked a lot this afternoon about comparison between these assets and traditional financial products. I wanna make sure that these new tax treatments don't give any advantages to the digital asset industry, because that ti- that kind of deferral is a huge tax benefit and a huge departure from current tax policy norms. I also want to discuss the opportunity to increase some anti-abuse guardrails because these tokens can be volatile. I want to make sure we have adequate anti-ab- abuse provisions in place. And I was glad to see the inclusion of some wash sale rules and constructive sale rules, but we have a ways to go in terms of anti-abuse. In Congressman Horsford's Digital Parity Act, we have a higher threshold for charitable giving. And because of the volatility of these tokens, I believe that stricter guidelines around charitable giving are necessary in order to prevent prevent fraud. Mister Karcher, do you agree with that?

I think that, um, you can actually kind of get both administrability and anti-abuse here at the same time, right? If you're able to leverage the market for price discovery by allowing spot price for really big digital assets, that's a win for everybody. And then you, there's a question of what to do with

Great, thank you. Um, as this committee knows, we had a bipartisan product with stricter anti-abuse frameworks And I I am glad to see the inclusion of some provision from Congressman Horsford's Digital Parity Act included in these conversations, and I would hope that my Republican colleagues would support them. Um, I look forward to hopefully seeing more of those included so that we can create a lasting bipartisan tax framework with those stricter anti-abuse guidelines. And with that, I will yield back.

Mister Estes.

Thank you, Mister Chairman, and thank you for our witnesses for being here, uh, today to pride expertise on an issue that directly impacts everyday Americans, our financial institutions, and our nation's competitive edge. As we sit here in Jun- June of twenty twenty six, the digital asset market has reached a staggering three trillion dollars. Roughly fourteen to thirty percent of American adults now own or interact with crypto. Nine States represents eighteen percent of the global digital asset revenue and commands over a third of all Bitcoin mining operations. But despite this momentum, the industry is operating in a regulatory vacuum. Current tax code never envisioned these cutting edge technologies and forces digital assets into roads that don't explicitly mention them. The result is a lack of clarity and parity for digital assets along with an administrative nightmare. System now is the the equivalent of a highway with no guardrails to keep cars from running in the ditch. If we don't establish some clear rules of the road to provide certainty, consistency and simplicity, uh accidents will continue to happen. Consider the sheer scale of the paperwork burden on everyday uses of digital assets. For the twenty twenty-five tax year, IRS required hundreds of millions of ten ninety-nine eh DA forms. According to brokers, half those forms were for transaction amounts below ten dollars. That's completely unworkable. Forcing a taxpayer or a broker to calculate capital gains on a micro-transaction every time they buy a cup of coffee or interact with a blockchain protocol, doesn't protect against tax avoidance and abuse. It just creates a mountain of red tape that stifles everyday commerce and innovation. Furthermore, our system for digital assets lacks parity with traditional finance. Important tax rules and familiar frameworks that govern traditional equities and financial institutions don't apply to digital assets simply because they don't didn't exist when the laws were written. Look at the difference between tax anti-abuse rules between digital assets and traditional securities. These long-standing rules around wash sales and constructive sales, traditional securities don't apply to digital assets. Extending these rules to digital assets ensure they are not treated better or worse than similar financial assets and provides consistency and clarity, for investors and traders. Tax uncertainty is already pushing the crypto industry offshore, directly advantaging our foreign adversaries who are eager to replace the US financial leadership. It's incumbent upon Congress to provide the standards that will allow the industry to thrive here in the United States and not cede the future of digital assets to China. Without U. S. authored standards and definitions, capital, innovation, and jobs will flee America. We must streamline the tax code to ease the burden on everyday Americans, brokers, and IRS alike when dealing with digital assets. Our legislation needs to establish crucial guidelines that will allow innovation while protecting investors and taxpayers. Yeah, I look forward to being able to have some conversation around the legislative proposals. Uh, Mister Slatkin, uh, this the data showing that half of all ten ninety-nine D

Uh, thank you for the question, Mister Estes. Uh, thank you for the question, Mister Estes. I I think it it's it imposes enormous administrative I I think it it's it imposes enormous administrative burdens in terms of creating systems, burdens in terms of creating systems, data, data, things that we have to do essentially to report both to our customers, educate our customers, and then file that information with the Internal Revenue Service. We should not be focused on hundreds of millions of transactions that are let's say ten dollars or less. I don't think our even the average taxpayer understands why we would have to do that. Their uh presumption is that that those trans- transactions should not be uh are just not within the tax net at all. So I think the legislation goes a long way to solving that problem. It solves it for stable coins which don't even generate gain or loss. it solves it for de minimis transactions. We could probably expand it further, but as a starting point, this is an enormous benefit overall. I also wanna reiterate something you said, but I think has gone unstated here. We are not here for a subsidy, OK? I just wanna make it clear that I did not come here to Washington to ask for a subsidy for our industry. And I really object to the terminology being used here as though we're asking for a subsidy we're asking for clarity rules of the road so there are customers know how to report transactions we want

Yep.

We want administrability, clarity. And so that that's what really we're asking for.

Thank you. All right, thank you.

Right.

You know, the amendment to HR ninety-one seventy-five is premised on the notion that the draft left open the opportunity for significant abuse. However, the JCT score shows that it uh the amendment would only net ni six million dollars over ten years, compared to the base text of the bill, proving a very slow uh potential for abuse. Mister Kirschner Kirschner, eh uh your remarks mentioned additional guardrails like studies on additional h uh market cap. thresholds or would uh annual trading volume would would it be necessary uh but uh doesn't comparing the score on the amendment from JCT show that the potential abuse is minimal?

I'm not an economist so I I don't know what's behind that JCT score, but I know that historically when you look at um what's happened in the charitable space with respect to appraisals, there's a significant amount of risk in the system if you don't have good guardrails, and this is again one where you can get to a much more administerable and cheaper answer for taxpayers by leveraging market transactions rather than appraisals.

Thank you. Now you're back, Mr. Chairman.

True, that way.

Thank you, Mr. Chairman. I want to thank all of our witnesses. Um, uh, Mr. Karcher, uh, as the ranking member of the oversight subcommittee, I am really concerned on how the IRS will administer any proposed changes to the tax treatment uh because of crypto. Um, given the fact that the IRS has lost substantial staff and leadership capacity, what should the IRS be doing to demonstrate that they will be capable of implementing any of these changes? And does Congress need to consider providing more resources to the IRS, if any crypto package uh passes into law?

The IRS has been significantly defunded and that's a real problem from run into implementing any new law or legislation or new systems. required, including the changes to reporting that would make life simpler for users and for the IRS. So I think there's a bipartisan history of, in bipartisan bills, um adding IRS funding for implementation and that seems like something that could be worth further study and could be appropriate.

Yes. Um you know the tax treatment of mining and staking has rightfully received a lot of attention today. Um in your testimony um you highlighted parity concerns about deferring tax uh on mining,

I think there are two elements here that create complications. One is that folks who receive rewards will have to bifurcate the reward,

Mm.

so they'll a slug of newly minted tokens but they'll also potentially get fees, and you have to distinguish between those two and treat them differently. And then, you know, because you don't tax the rewards until disposition under the bills, that could be very many years. That could be forty years for somebody who's thirty, forty years old right now and uh engaging in these transactions.

Yeah. You know, one of the reasons why I think a lot of us um were um particularly concerned about this un- indefinite period of uh deferral and how that can be abused um i'd like to ask you miss riley i mean you've talked a lot about uh the various um uh complex issues that crypto bring up and you suggest proposed legislation can you talk a little bit about um how we can best deal with um the potential fraud and abuse that can be can can happen with with indefinite deferral periods

Um, I think the important thing is when crafting um any rules around indefinite deferrals making sure that there aren't loopholes or opportunities to perpetually or indefinitely defer like I know we're saying indefinite but there's there should be um limits on the ability to transfer or do anything under any of the other non-recognition provisions of the code um

Yeah. I mean one of the provisions that uh Mister Hor- Horst-Rittsville is to do a five year window um and your thoughts about whether or not that I mean I I mean I the year could be extended, but the point is indefinite doesn't seem like it's a it's it seems to me a non-starter, but can you talk a little bit about whether or not you think the five-year window would be appropriate?

Sure, I think one helpful analogy to look at when you look at the election, for instance, is it's similar to the rules that govern eighty-three B elections but the reverse. I think one factor, although there are many similarities between eighty-three B election scenarios and this is, typically when you have a person that is deciding not to make an eighty three B election, there is some vesting window for those transactions in the agreement. Here we don't have similar facts, so I understand um you know the deferral window i- th- is trying to provide some equivocacy there. Um so I I can understand kind of that position.

Yeah. Um, Mister Karcher, um, I wanted to also in your testimony you talked about the crypto um, asset reporting framework. Um, can you elaborate on why this framework is an important, um, part of any, uh, package for crypto and why that framework, um, would provide the kind of clarity, um, and, uh, oversight provide us with tools for anti-tax erosion, um, and how we in Congress can help to push for a review at OMB so that we can implement, um, such a framework.

Absolutely. These are extremely mobile assets, right? And so it's hard to know where reporting is going in some cases. Carf would try to address that by creating global standards.

Mm-hmm.

Uh, and they would really help both on tax evasion but also on anti-monolendring, anti-terrorist financing, and other kinds of safeguards that aren't necessarily taxed, but also potentially for tax. They've been sitting at OIRA for many months now.

Yep.

Uh, I'm not sure what the hold-up is, but normally they deal with those within forty-five days. So some oversight could be appropriate.

Yeah, before I yield back, I I'd like to just uh again reiterate with what Miss Sanchez said, that I think that there's some room for bipartisan support on crypto, and I look forward to um this committee allowing for such bipartisanship to occur. Thanks.

Thank you. Uh, I now recognize myself for five minutes, and I I do wanna thank Chairman Smith for convening the hearing. I wanna thank all of you for appearing. not only for your uh oral statements but for your very thorough written statements. Miss Wiley, if I if I could with you, and I did review your statement along with the other witnesses, under current law, digital assets are often not clearly eligible for long-standing tax benefits that are available to traditional financial assets. We've talked about that in the hearing and you all have talked about that, including the safe harbor in section eight sixty-four of the code, and the securities lending safe harbor in section ten fifty eight. Yesterday I did introduce a bill that Chairman Smith referenced. The title of it is the Providing Analogous Rules for Digital Assets Act, the PAR Act. The bill number is HR nine one seven six. What the bill is intended to do would be to extend the existing safe harbors to digital assets so that Foreign persons can invest in the United States markets without being treated as engaged in U.S. trade or business and taxpayers can lend assets without triggering a taxable event, analogous to current treatment for securities. My question to you respectfully is, does the trading safe harbor for digital assets in this PAR Act that I've just described to you do anything different than the current safe harbor available for other financial in section eight sixty four or does it simply put digital assets on an equal footing

Um thank you for the question Congressman and thank you for your introduction um of that bill, much appreciated. Um the trading safe harbor in the par act merely extends the same safe harbor currently available to securities and commodities to digital assets. And this really puts US um digital asset brokers, asset managers and custodians in similar on a level playing field. with our with non-U. S. competitors. Um and the tax policy reasons for those trading safe harbors and the securities and commodities um context should apply with full force in the digital assets context as well.

Thank you. Um if I could uh and Mister Zyklon if I can with you uh perhaps Congress would create a digital asset under the par act uh safe uh lending safe harbor that's intended to closely section ten fifty eight framework for securities lending so that a qualifying loan of of digital assets is not treated as a taxable sale. If we can look at it at lending, can you walk us through how this section ten fifty eight style safe harbor uh digital asset loan would operate in practice or in practicality and how it would benefit?

Uh, thank you Congressman, uh, and thank you for introduce- introduce introducing uh the par act. Uh section ten fifty eight is a very critical feature of the crypto-economy. It allows participants to lend digital assets without risk that that will be essentially be a taxable transaction. It's a core aspect of of our uh financial services industry with securities lending. One of the first projects I worked on when I started at Coinbase was to try and obtain a ruling from the inter- internal revenue service that existing law applied to digital assets we were unsuccessful in doing that but essentially it creates liquidity, and it provides the parity that you just described. What it does is it allows me to lend a digital asset to you, as and that loan is not a taxable transaction. I'm still, it's restored to me with a fee, for the borrower pays a fee for that, and I enjoy the same benefits that I had before I loaned it. So it essentially just acknowledges the aspect that it's a non-taxable transaction and puts you at a level playing field with the rest of the securities industry. It's today, h- despite the absence of law, again, again calling for par- for clarity, h-

Thank you very much. Thank you to all the witnesses. I'll yield back my time and at this time recognize Miss Chu.

Mister Karcher, I think the Tax Clarity for Mining and Staking Act contains one of the most consequential and controversial provisions our committee is currently considering. And that is that taxpayers who receive mining or staking rewards could elect to defer taxation on those rewards until they dispose of the underlying digital assets. And there is not in this proposal any maximum deferral period allowing miners or stakers to defer their rewards indefinitely if they choose. Now, supporters of this provision argue that mining and staking rewards are more comparable to an asset or to inventory and therefore should not be taxed until they are sold. An alternative characterization would be that mining rewards are better uh analogized as a payment for effort taken by taxpayers to verify transactions on the blockchain, thus they are more akin to labor income more than anything else. So, Mister Carcator, what do you think is is the correct characterization, and therefore how should these rewards be treated?

No question.

I think really what the compensation or the rewards are for, is for validating and updating the ledger and who owns what. And that looks a lot like a service, just like a notary when they're stamping a document, just like an accountant or somebody else who's keeping a ledger, and so it feels like a service. And I think that's completely consistent with the IRS's position, it's consistent with current code section sixty-one, it's concer- it's c- it's also consistent with the tax court case from last week. uh that made the point emphatically clear that under current law those rewards are taxable when earned.

And therefore what would your recommendation be as far as a period of time for tax taxation?

As a pure tax policy matter I think that deferral is inappropriate. I can imagine various reasons why this industry would uh like need potentially or want potentially some short term deferral to deal with liquidity. I know that the Digital Parity Act has thought a lot about that. If you were to do a short-term deferral, I would encourage it to be quite short, um, as low as a year, but I can understand the idea that, uh, it's hard to have a cash tax payment without having ever converted the money to cash. So, yep.

And one rationale is that the industry portrays miners as small entrepreneurs, but there, actually there are only three companies that control the majority of crypto mining for Bitcoin. Given this market domination, what compliance concerns do you have regarding this kind of indefinite deferral for,

I think a lot of the tools that have been used for tax avoidance over the many years would continue to be able to be exploited in an indefinite deferral situation. There was obviously an amendment, um, that would potentially limit deferral to four to five years. That would create less opportunities for abuse. If you're allowed to hold until disposition, then you're gonna see a lot more ability to use tax structures to not just defer the income, but to eliminate it from income entirely forever.

Thank you for that. And, Mister Carter, I wanted to follow up, uh, I know in your, uh, testimony you talked about the charitable deduction for digital assets. And, uh, the act that is before us would allow digital asset donations to qualify for an exemption from the independent appraisal requirement if the asset has a market capitalization of more than five hundred million. In your testimony, you suggested that Congress should consider a higher market threshold. Why would a higher threshold be more appropriate? And what concerns do you have with the five hundred million dollar threshold as proposed in this bill?

The real risk that you're worried about here is if players have so much of the part of the the the the relevant digital asset that they're able to move the price themselves. Obviously when you're donating to charity you would like the value to be high. So if you can take some market action to increase the price temporarily before donating it, that could help you generate uneconomic charitable deductions. And that's what you're trying to, I think, manage. Five hundred million could be the right number, but I just think that it's worth further study to make sure that you land in the right place. Um, some of the pressure on that is relieved if the amendment that requires the sale of the digital assets uh were to be also adopted because then you're still leveraging the market for price discovery without having the appraisal issues.

And I know you thought that there should be further study on certain issues. What would be the highest priority study?

Right now I think that the digital assets tax gap is gonna be pretty low for the ones that are traded on custodial accounts and really high for those that are not, and I think that's worth a lot of study.

Thank you. I yield back.

I'd like to inform the members that votes have been called on the House floor. I intend to call a recess following Miss Tinney's five minutes of questioning uh and to call the committee back to order immediately following the vote series. This time, we recognize Miss Tinney.

Thank you, Mister Chairman, and uh thank you to the witnesses for appearing today on this uh important topic. Uh it's obviously digital assets are no longer a niche corner of the financial system more than one in five Americans have heard one in eight one in five but Um, most Americans it seems, or many Americans now own cryptocurrency and the total market capitalization of digital assets is we're estimating at over two trillion. Um, this is a major first step to establish tax certainty and rules of the road for this growing asset class. And uh, I as a as a member of this committee, I I know I always think of four things, uh, the tax law, rules of the road, and this is a little bit more of an esoteric subject for most of us, but simplicity, transparency, stability, and neutrality I think are what we're gonna be l- uh looking and I think, Miss Riley, you mentioned those in some of your testimony. But one of the things I hear, uh, from, uh, my constituents, not just in New York twenty-four but all over New York State, is they want to participate somehow in the digital economy. They want to do it safely, um, through familiar vehicles and something they can understand, uh, the same type of exchange traded products that we know and that we already use for stocks and bonds but right now one of the quiet barriers is the uncertainty uh there as around whether a grant or trust or a structure uh most crypto ETFs are under can stake held assets without jeopardizing its tax classification. I just heard my my colleague on the other side of the aisle mention this. So, Ms. Riley, I loved having you meet with me, it was one of the most uh informative meetings I had to learn about this, this uh you know interesting new uh frontier we're on. Um I want to follow up on what you talked about and in my office and um You know, fidelity has been on the front lines of bringing digital asset projects, you know, to everyday investors, people I just described. Can you explain what the current tax uncertainty around the grantor trust staking has meant in practice and how we can fix that? Or or or let's make it less uncertain.

Uh, thank you, Congresswoman, and, yes, I very much appreciated your time. Um, I've the revenue procedure that came out of Treasury last fall was really instrumental in giving some interim's uh uh guidance in this area and um remove some of that ambiguity. But even though that's a very helpful safe harbor, only legislation can provide a durable and consistent policy for retail investors. And in the retail space it's very important that the rules aren't changed um, you know, for products that they're holding in their brokerage account.

Mm.

And a revenue procedure can be changed fairly easily um in in the future. And so having that policy um, codified is really important to provide that certainty to those retail investors going forward.

So we've been talking a lot about the tax clarity for mining and staking act, uh, recently, uh, that codifies recent irs guidance allowing, you just mentioned the grantor trusts, to receive staking rewards without losing their tax classification. Does that provision resolve the ambiguity you just described? And how will this translate into a yield growth for ordinary Americans? And and much like what Ms. Chu raised, is Is there a concern that we should have with that?

Um, the language in the proposed bill does um not only codify the safe harbor um that treasury but it also removes the um a sub-optimal distribution requirement and also provides some flexibility for um managing the liquidity to meet redemptions which is very important for any exchange traded product. When you purchase one you expect that you should be able to redeem um that

So let's stay on the interior uh the retail investor theme. So let's stay on the interior uh the retail investor theme. Uh, Uh, So let me ask you, for many Americans holding um, after the ETF holding digital assets, how about through their IRA? How is that affected? And this is a question I want to ask is what How how is that gonna happen in the same level with the IRA?

Uh that the um the question of

I mean does it protect their tax exposure with an IRA?

Yes, I think the ambiguity persists there. There are very specific carve-outs to what's subject to unrelated business taxable income. Um, and things like passive investment income are typically carved out, and even though staking is permitted in Grantor Trust, and Grantor Trust cannot engage in business activity, which suggests that this income is passive in nature, because it's not expressly carved out under those rules, there's lingering tax uncertainty there, which is, um, could essentially deprive people that are having, you know, investments in proof of stake, cryptocurrency, in their IRAs, from a lot of the um value proposition of of participating in proof of stake networks.

So we have to look to Treasury for guidance.

Um or legislation.

Or legislation. Thank you so much.

Thank you.

My time has expired. I yield back.

As a the as announced, the committee stands in recess until immediately following the vote series.

The hearing will come to order. Recor- recognize Mister Moore for five minutes.

Thank you, Chairman. Thank you to our witnesses. This is a incredibly important conversation for us to be ab- to be having, uh, that needs clarity, needs ability for us to suss out this and so your expertise has been has been very helpful today. The the Charitable Deductions for Digital Assets Donations Act simplifies the process around charitable donations of digital assets while also providing parity between digital assets and other financial instruments with similar characteristics. As we know, the process around receiving a qualified appraisal before claiming a charitable deduction can be timely, costly, and confusing of course for taxpayers. Even if That's why the bill requires digital assets to meet certain requirements in order to avoid qualified appraisal requirement, therefore, thereby protecting charitable organizations from so-called sort of pump and dump schemes. Mister Slotkin, do you think the language included in the charitable deductions for digital assets donations act adequately protects against these types of pump and dump schemes?

Uh, thank you for the question, Congressman. I absolutely do. I think it's a a very good attempt at at resolving the issue of pump and dump, and and uh providing simplification. So what it does is essentially creates equivalence and parity with financial services where there's already an exception for publicly traded stock. So there's an equivalent definition for widely traded digital assets, with lots of protections built in to ensure that we're dealing with assets that have readily ascertainable values. So, for example, on the Coinbase exchange we have a, you know, price discovery, wide trading, people cannot manipulate, that's essentially uh uh impossible to do, so it basically ensures with those protections that charities are receiving rightfully what they were uh supposed to receive, and that uh taxpayers can't abuse the system uh in of itself. So it's parity, it's equivalence, and it's simplification, all all rolled into one.

Any any hang-ups or snags that might come with this? as you talk about it, it seems pretty straight forward and uh but anything that you could see um you know impeding us to be able to accomplish something like this.

I c- So there's been some debate over what was what's defined as market capitalization, in other words the amount of the token and whether it should be with the the proposal in the bill I think is rightfully five hundred million. Um there's been a proposal to expand that to ten billion, and I think though we can agree or disagree about that number, about market cap. I think the real question is do you have a red- do you have a market, and is it manipulable, and I think

Excellent. Seems clear enough in a very unclear space, and this is why we need to kinda hash these out. Thank you. Mister Somansato, we have heard about a recent tax court case. Are you familiar with that case?

Yes, mildly, I guess I'll say.

Yeah, you, what are your thoughts on, on the, on the Paschall case and, and the legal certainty around staking? Um, has it been fairly described here?

Uh, I guess, uh, whether it's been fairly described, it would be more, uh, the position I would take is I don't think Congress should be relying on a single tax court case to come to this determination on this difficult issue. My understanding of the case is that it was a pro se litigant who was dealing on stipulated facts uh with the other side and that the judge even lamented the lack of expert testimony on some of these topics and moreover the in staking that was involved there involved a centralized institution between the taxpayer and uh and the protocol here and so there's like a lot of questions that a very straight forward hey the tax court found that uh staking rewards our income Uh, I don't think you can take that legal certainty away from one such decision with kind of all of those factors at play.

Excellent. Thank you so much and appreciate an yield back, Chairman.

Miss Moore.

Thank you, Mister Chair uh, Mister Chairman, I've heard about clarity and parity and charity and validators and regulators, uh, and I guess someday we're gonna get this right. Let me s- Mister Kirscher, can I start with you? Um, you opened up your testimony earlier today by saying that our financial, our taxation system was built to really accommodate any sort of new products, new economic activity, the latest and greatest thing. So, why do you suspect that we're having such a difficult time um inserting this new industry into current system for example i've heard people talking about trading isn't that something that the scc would do we already have an institution that does that say for example the cftc were still stood up the way it was supposed to or uh why do we need do we need to redo everything you said we could push all this stuff into our existing system i just want you to expand on that a little bit

Yeah, I think that the tax system, just by its own nature, applies already to digital assets. Um, and some of the answers might be answers that you wanna like tweak or revise for a variety of reasons. So we've talked about extending anti-abuse rules from financial, uh from from other financial spaces over to digital assets. But also there's some things that taxpayer, that are taxpayer favorable that are appropriate, right? So fixing some of these issues with charitable valuations, that's a great uh and that could use some work um some of the stuff on mark to market seems like perfectly appropriate but sometimes those rules are like drafted in the code so that they're specifically related to certain asset types and they just don't today cover digital assets so i think that those are like potential potholes

oh what kind of answer is this i mean is it is it a commodity i mean it are are they is it property is it what what what is it i mean if you know i hate the example of buying a cup of coffee with a bid price but I keep hearing people say it. So what is I mean people don't even buy a cup of coffee with a credit card. Much y y I don't know, sounds like you have. So can you just tell me um let me ask this question. I heard you say that one in eight people own some kind of cryptocurrency. What pers- what's the distribution of people who own these assets? You know, is it me giving my granddaughter a bitcoin when she graduates from high school and she's an owner? Is this what's the distribution of the owners of these assets?

I wonder if one of my like co-panelists is a better one to answer that question.

Yeah. Mister C.

They have better data.

Do you know the distribution of people?

S uh I think we started uh thank you again, Ms. Moore, for the question. I think you'd be astonished at how democratic crypto actually is, it actually has

Okay.

enormous potential to reach the underserved and the underbanked.

I heard you say that too.

Yes.

So the under the you know the underserved person who owns bitcoin, are they staking it or are they just owning it?

It it may not be just people who stake assets, again I draw back to the uh to the use of stable coins, which are probably the most efficient mechanism, just internet accounts. having an account on Coinbase, I can transfer value to you without using a bank intermediary. Many of our population, many of our many of your constituents don't have access to banks, because they're for a variety of reasons. But I just think the the enormous potential of this technology is its most powerful form is that it basically reaches just about everyone. So you can't it and it's un- it doesn't just fit every asset class or like it's not just one. That's part of the problem actually. So you I think you rightfully stated what

Okay, thank you. Okay. Thank you. If the goal is to facilitate everyday payments, If the goal is to facilitate everyday payments, these lower income people who own this crypto, these lower income people who own this crypto, why shouldn't relief be limited to regulated payment stable coins why shouldn' it be limited to regulated payment stable coins rather than extending benefits to speculative assets that are primarily held for investment so as to make a distinction.

Uh, if I may, um,

Yeah.

the definition of of stable coin includes stable coins that this Congress regulated under the Genius Act. So, an appropriate, I agree with you that stable coins themselves can have various parameters, but those stable coins that are designed to be essentially traded at par, one dollar for one dollar, those are the pa- statement payment stable coins that we're talking about, and those are regulated. and they were essentially regulated by an act that this Congress um uh intelligently decided to pass uh last year.

Thank you. My time has expired. Are you all back?

Mister Fitzpatrick.

Thank you, Chairman Smith, for holding this hearing. Thank you to all of our witnesses for being here. As digital assets continue to evolve and become more integrated into our broader financial system, it is increasingly important that the tax code keeps pace with these developments. Effective tax administration relies on clear, objective, that taxpayers can readily understand, and that the IRS can apply consistently in practice. Without precise definitions and workable rules, rapidly changing asset structures can create uncertainty, increase compliance burdens, and lead to inconsistent treatment across similarly situated taxpayers across our country. Under current law, as you all are well aware, the only definition of digital asset appears in section six zero four five of The definition included in that section is very broad, and it does not distinguish between different types of digital assets and the ways in which they are used by taxpayers. Um, obviously this can create confusion for taxpayers who use digital assets, and makes it hard to identify how certain transactions involving digital assets should be treated from the taxpayers' perspective. This series of legislation, uh, as it's been described by my colleagues, aims to

Uh thank you for the question, Congressman.

Yes.

Um as you know, a part of the challenge of legislating on digital assets is that digital assets can have a variety of use cases. They can be used for investments, governance, payments, and business activities. Um, if you're going to make policy decisions to treat assets um differently in different contexts it's very important to have clear defined rules to to bucket those assets. Definitions like traded uh digital asset and widely traded digital asset provide clear lines to help distinguish um when assets are m more like analogs in the tax codes such as securities and commodities that are highly traded.

And zooming in on the tokenized asset definition, um here it would apply to any digital asset in which uh more than an insignificant portion uh of its value is tied to the underlying asset right uh or interest, rather than uh the operation uh of the blockchain in which it is recorded. Um again uh to you Miss Riley, um as it relates to this definition of tokenized, um, is it your belief that there are other considerations that should be made here?

Just to to note, I think under general tax principles, we generally consider tokenized assets to be treated um consistently with the nontokenized version for tax purposes. But having a definition like this is very helpful, especially in an area where we've had a lot of ambiguity. So this clarification is appreciated. The definition of tokenized digital assets specifically refers to, as as you know, um, assets.

Thank you, Miss Riley. Uh, you're back, Mr. Shulman.

Mister Feenstra.

Thank you, Chairman Smith, uh, for holding this hearing today, and I just want to thank each of our witnesses I want to tell you, you are the experts in the field. And it's exciting to hear and and read your testimony. I'm actually really excited. I'm excited about the opportunity of what we have as a country, uh, going down these paths. Uh, I, I fully understand that we have a lot of uncertainty. Uh, and that's what we're trying to do today. We're trying to create an opportunity to create certainty, uh, and guardrails, uh, that we can create capital growth in, in our country. As we see, with uncertainty, it creates this area where, where where uh people go off shore uh because they don't know how to handle all the things that we're doing. And and we have an archaic system and and we're gonna change that with the seven bills that that that are out there that we're hoping to to mark up. In Iowa, alright I'm a farm kid, in Iowa our farmers understand the idea of creating value by recognizing income. When a farmer plants corn, we don't tax them the day the corn comes out of the ground, we tax them when they actually sell their crop as realized income. Digital assets, asset miners and stake stakers can face taxes when they receive a newly credited digital asset even before they have sold it or realized the value of the asset. Okay, that's wrong. Congress, we have the responsibility to make sure our tax code keeps up with innovation like this, while applying common sense principles that have worked for our industry over the decades when it comes to agriculture and many other things. Miss Riley, thanks for being here. Uh, I would love to ask you about your your company and how things are cuz this is all new to you too, I'm sure, over the last decade. But can you explain why this legislation strikes the right balance to create a more consistent tax framework framework? Well, and sure, costs for these ordinary assets are properly accounted for through capitalization. I know you went through this shortly, but I wanna hear it again.

Uh, thank you for the question, Congressman.

Uh, thank you for the question, Congressman.

And I I think one thing that we're really looking for in this legislation is clarity on

And I I think one thing that we're really looking for in this legislation is clarity on the fact that there are there are there are certain types of legislation that are that are going uh and moving forward with this,

you know, the timing, character and source of staking and mining and other validation rewards. And this legislation certainly addresses that. And I think it's also an acknowledgement of the reasonable arguments on both sides, regarding the, you know, the timing and how that should be treated under the tax code. And a- a- allowing for taxpayer electivity seems like an appropriate solution. Um, especially given that there are pros and cons, um, to the individual taxpayer as to whether that would actually be beneficial.

Uh yeah, I agree. I mean, it gives them some certainty they they now will know uh how to how to how it's gonna be taxed I mean i- i- it creates some forward looking of especially in your organization of what they can account for correct?

Absolutely, and that's one of our goals in seeking um legislation is we want to be able to report things accurately to our clients so that they can report things accurately on their tax returns and this definitely provides um clarity on,

Yep.

on those points.

Yep. Uh. Mr. uh uh Salman Sadow, I wanna ask you sort of the same question. Obviously, compliance a- and complexity, I mean, it just seems like we're so deep in the weeds on paperwork right now, especially when it comes to ten ninety-nines, under ten dollars, and all this stuff. Could you explain how the legislation before us exta- establishes clarity in transaction using digital assets and accounting for gain or loss, so Americans can confidently participate in digital asset economy?

Yes, uh, I think there is a few important ways that the bills do that. One that we've talked about a decent amount is the idea of excluding gains from the stable coin uh calculations and from the gas payments which is really important. Um, I think perhaps more interestingly is uh the simplified accounting methods that are also included in that same bill, which basically take on the recognition that people are making numerous transactions with these whether they look like payments, like trades or buying something like an nft and uh trying to come up with a system whereby we can simplify that for the individual taxpayer and doing that through basically understanding you know their total gains throughout the year uh and crediting you know certain dispositions in sales throughout uh creates a system that would make it much easier on the average individual to be able

that's true

to take on the task of trying to figure out what the tax liability looks like for so many transactions

i think more people will engage I mean, a- and right now the c- the system is so complex that a lot of people don't engage, they don't understand it, and they're worried about it. And I think these bills will help that. So I'm excited. I mean, it'll, it'll create capital growth in our country and not see it go overseas. So thank you again for each one of your, your thoughts and, and uh your witness testimony. Thank you. I yield back.

Mister Swasey.

Thank you, Mister Chairman, thank you to the witnesses for all the time you've spent here today. Uh, people have been in and out of these hearings all day because we've had so many things going on here in Capitol Hill. And I'm a pretty well-educated person. I'm s- trained as a lawyer and a CPA. I'm a member of the United States Congress on the Ways and Means Committee, and I really don't understand cryptocurrency that well. And I think that I speak for many American people that they really don't understand uh cryptocurrency that well. Uh, but we're t- today talking about what kind of tax policy can we establish here in our country because we have a couple goals. Number one is, cryptocurrency is not going away, so If it's gonna succeed in the world, we'd like America to be at the forefront of that success. And clear tax policy will be an important part of making sure that America does remain successful. Another concern of uh of Amer- the American people is that they're concerned that because they don't understand this and that cryptocurrency is decentralized it's harder to track, and they're worried about uh illicit transactions taking place uh utilizing cryptocurrency as opposed to the traditional currency and banking methods. So I just wanna ask you guys a couple different questions. Can you first, uh one of you, maybe you, mister Kacher, tell me the difference between MemeCoin, StableCoin, and Bitcoin. And you have to make it very brief, cuz I only have a few minutes.

A stable coin is the place to start. It s- feels the most of the bunch, like a fiat currency in the sense that it is supposed to

By a fiat currency,

You mean? like the US dollar, like a government issued currency in the sense that it is meant to track and be pegged to the dollar um bitcoin is I would say more like a different kind of asset, uh it can rise or lower in value

More like an equity?

Yeah. more like an equity, some people say gold, but those are probably the two most common parallels that I hear. A meme coin is neither of those things, it's more like a uh like a meme stock right, uh uh uh sort of an asset class where there's nothing inherent to the value,

Would you say that any one of those three types of cryptocurrency are more attractive than the others?

I think that the one that's the most attractive in terms of potential, like, use for the things that people talk about, buying stuff, stable coins seem like they have the most promise.

What about you, Mr. Samasanta? Would you say that one of those is more attractive than the others?

Uh, I think attractive in terms of use cases for a blockchain network.

Well, it's good for America and good for our economy, of those three. Are they all good?

I guess I leave it up to the individual.

Much leadership, Mr. Sabinsanto. Okay, Mr. Zlatkin, what would you say?

Uh, I think they're they're all valuable and I think they all serve their purpose, and that's one of the great aspects about the crypto industry that has lots of variation.

What purpose does the meme coin serve? What what purpose does the meme coin serve?

At the same purpose that any social network has, people like to tr- to create things, uh they like to create uh music, they'll so they create meme coins,

I mean there's wild fluctuations in the value of meme coin.

so

They go way up and they go way down. People lose their shirts when they try to There's no intrinsic value, as Mister Karcher said. So you would say that's of equal value as a stable coin as far as what's good for our our economy?

Again, I'm not passing judgment. I'm just saying there's a very d- number of tokens on them.

How about you, Miss Riley? Do you feel any of these, one of these three are better than the others, or they're all equal in your mind?

Well, I think it really depends the context in which you're talking about them. I mean, I think you could also argue that trading cards have no intrinsic value, but they have value to the people that want to trade in them. So I th I think something like meme

We don't really have much of a a tax structure or policy regarding trading cards, would you say?

But I I think we're less concerned about the trading of meme coins and more things like stable coin that are used as you know mediums of exchange for payments and everyday transactions um bitcoin is also given you know the how many f- people own bitcoin it is used in transactions it's used for investment um

So but what about meme coin, would you say that's used for investment or for transactions?

I don't believe we have a very strong view on meme coins.

OK. OK, very quickly, I've only got fifty seconds left, ten seconds, if you could just tell me the major benefit of cryptocurrency, mister Karcher.

It's a free market and people should invest in the stuff that they think is useful to invest in that's part of the fiber of America.

Mister Samasato.

The ability to send assets in a peer-to-peer fashion without an intermediary to censor those uh transactions.

Mister Zlatkin.

It leverages the use of the uh blockchain, blockchain technology for the financial economy. So it democratizes and gives us access to a more efficient system for running the financial economy.

So moves things more quickly also, so if you wanted to do a stock trade with cryptocurrency, it would clear faster. Is that true?

It clears instantly. It clears as quickly as an email.

Miss Riley.

So just to build on that, I mean I think the speed, the security, and the reduced costs are all key parts of what makes it valuable for the financial system.

Well, I really appreciate all of your time.

Mister Kerry.

Uh, thank you, Mister Chairman, I also want to thank the ranking member for this uh very important meeting uh i- uh uh committee meeting uh discussing bipartisan um issues regarding digital assets. You know last April, and uh some of you already know this, this committee produced the first digital assets related legislation that was ever And uh this was the defi broker rule um CRA. Now, when the, we had the bill in this committee, um we ultimately when it went to the floor, it passed out of this committee, ultimately went to the floor. We had seventy-six Democrats that voted with us on this, on this uh on this rule. Unfortunately, six of them were on this committee, were my colleagues on the other side. Now they didn't vote for it in committee but ultimately were part of the seventy-six that voted for it. So I think in the end, the explanations and the questions that we have today, once you see everything that has to do within the context of these bills, you'll see that this is, these are really good pieces of legislation. Um, one area that I'm particularly interested in, obviously I'm carrying it, uh, which is the, the clarified mining staking act, but I - I - I just wanna just kind of maybe focus on that a little bit. So, Mister Samansano, can you ver- very briefly explain, and I think this is important, I - and my colleague just asked you to - kinda clearly say what is good and what is bad. But if you could just explain these terms, okay, for not just the members of this committee but people that may be watching, explain mining and staking, uh, the to those people that may be unfamiliar with what those terms actually mean.

So I think the way I'll start at that is to talk about, uh, what process these players play in these ecosystems. Most importantly, what they are doing is validating the transactions. The way that these networks work without a central intermediary sitting there in the middle with a ledger where they're keeping track of all the transactions is you need all of the participants to agree on what the canonical transactions are so a staker and a miner are doing somewhat the same thing they are reviewing the transactions and saying, this is a valid group of transactions, and I can prove that, and I am putting something at stake. In the sake of mining, what you're putting at stake is your energy. You are using compute energy uh to solve a complicated puzzle, to be a basically be selected to play this validation role. Similarly for a staker, you are putting your assets at stake and saying, I will do this in a trustworthy manner, or my assets will be taken away. But either way, the process of staking and mining is simply validating those transactions and the really unique thing that goes on here is the protocol allows you to create new assets that is the incentive mechanism for people to participate as validators, as stakers or miners is this ability to create the new assets if you play this important role in the network.

OK, I I think those were good explanations, if we can get it at a quicker uh step it might be helpful uh for a lot of folks,

Yeah, yeah, it's kind of hard.

but Miss Riley I'm gonna go to you real The legislation that we are discussing today allows the taxpayers to make a choice between two prevailing theories about how mining and staking rewards should actually be taxed. Either newly minted digital assets uh are included as ordinary income upon receipt and held as capital asset thereafter or taxpayers can elect to treat newly minted digital assets like self-created inventory and recognize ordinary income upon distribution. So, is this the appropriate approach for uh from a tax perspective in your opinion? And why or why not?

Uh, thank you Congressman, and and thank you for your leadership and introduction of the the Tax Clarity for Money and Staking Act. Um, I think that there um there are reasonable arguments on both sides of the equation here and the option of having an um taxpayer electivity seems like an appropriate way to balance It i- there are pros and cons from a taxpayer perspective in terms of which is beneficial in terms of timing whether taking it into income immediately and having any appreciation get capital gain treatment versus um deferring uh recognition and having all appreciation be ordinary uh so it it is not an immediately you know preferential treatment for such assets and this seems like a fair way to to balance those um those differing arguments.

OK, Mr. Sagan, I was gonna ask you. Same question, but I'm running out of time, so we will we will get this uh uh for the record. I as you can see, I mean I this this is a very this is an issue that you you gotta have to kinda learn to walk before you can run type of thing and and I do think you'll find many members of this committee are committed to getting to that process on both sides of the aisle again, you saw it in the D five broker rule, I think you're gonna see it with this tax package as we move to the four. So with that, Mister Chairman, thank you again, and to the witnesses, thank you for being here. Uh without a yield.

Mister Mister

Thank you, Mister Chairman, truly appreciate it, and I appreciate the committee's continued focus on digital asset taxation and the need to provide taxpayers with greater certainty throughout this process. For too long, taxpayers have been forced to navigate a patchwork of framework and guidance administrative interpretations, and unanswered questions. Congress has a responsibility to establish clear statutory rules that promote compliance support innovation and preserve the integrity of our tax system. I think it's important to recognize that many of the concepts reflecting these bills were developed over nearly two years of bipartisan work, with Congressman Horsford and I spent considerable time engaging with stakeholders practitioners academics and industry participants to develop the Digital Asset Parity Act a comprehensive framework designed to address these issues in a coordinated manner. That framework was built around a simple premise. Digital asset tax policy should be coherent, administrable, and technologically neutral. The challenge before us is that digital taxation is not a collection of isolated issues. Mining interacts with staking, basis rules affect reporting, anti-abuse provisions affect compliance and investment decisions, changes to one area can have consequences in another. As we consider these proposals, I hope we remain focused not only on whether individual bills will solve discrete problems, but also whether they will fit together as a part of a durable, comprehensive framework. In some cases I'm concerned that modifications to previously developed concepts may inadvertently create new complexity or undermine the policy objectives they were originally designed to achieve. Today's hearing is an important opportunity to examine those questions, understand the interactions among these proposals, and ensure we get the policy right, because I believe now is the opportune time in order to move this forward for framework. So, Miss Reiling, it's good to see you again. Thank you for being here. We know that digital asset provisions often interact with one another in ways that aren't immediately apparent when legislation is considered separately. For example, basis simplification rules may operate differently for taxpayers who are subject to or elect into a mark-to-market regime. If Congress were to create a deemed basis regime while separately considering mark-to-mark treatment, are there circumstances where the interaction between those provisions could create unintended consequences or unnecessary complexity?

Um, thank you Congressman, um, for the question. Uh, I think I might need to give that one a bit more thought, um, in terms of how how those would potentially interact. Um, but I think that that is a a a valid concern about how, um, you know, code sections can have unintended consequences.

Yeah, thank you very much. As I said before, uh, and I'm very supportive of the process and the chairman behind me and what we're moving forward with and doing I just wanna make sure that you know once we get this right, that we truly get it right.

Um, I think, well, most people probably don't think about tax policy the way you do, and I wanna applaud both your efforts and Mr. Horsford's efforts in bringing us to where we are because you really sort of blazed the trail. Um, I think what you've accomplished and what taxpayers should think about is that we're developing a comprehensive framework for tokenization and f- and essentially the financialization of the blockchain, and it's a broad array of both industries, assets, and activities. And I think, um, to the extent that, and this, this series of bills actually ambitiously tries to address that. It tries to simplify it, it tries to clarify it. It provides clear rules for the road, and I applaud all those efforts.

Thank you very much, and for the reason is to move forward and I know there are some colleagues on both sides of the aisle that are uncomfortable with cryptocurrency and they truly, you know, uh, don't understand it or they just don't get it. You know, I can tell you in the state of Ohio, every one in every five Ohioans owns a form of cryptocurrency. So, these are the individuals, these are everyday Americans, and we have to bring stability to the tax code, and my biggest concern is, if we do not, people will not come to the United States of America to the crypto you know capital of the world as President Trump wants us to be, they're gonna continue to go to other countries and operate out of there because they will have a stable tax code that they can operate out of that won't be in a phantom tax so I greatly appreciate all of our witnesses here today, thank you for all of your hard work uh when it comes to pushing this forward, and I really do hope that we can get this in a good place to see to the finish line, but thank you Chairman, I yield back.

The gentleman yields, the chair now recognizes Mister Snyder for five minutes.

Thank you, Mister Chairman, and I want to thank the witnesses for your patience and and uh stamina as y as you're here today I'm I'm glad we're having this hearing uh to talk about a a a very important issue and explore ways that we can address some of the gaps in our tax code to better adapt to digital assets uh as my friend Mister Kerry noted uh it's it's a complex issue and I believe we need to understand the many facets of the issue as as he noted in the in the matter of crawl crawl, walk, Um, Mister Miller, uh, just who just spoke, uh, noted that we we should act, we should evaluate, we should evolve over time. This is not gonna be a one and done, uh, solution, I think. Most important thing I I I wanna, uh, reiterate is that we need to work at at this address this in a bipartisan way. We should be working across style. I believe and experience shows that when we find a way to work together to reach across style and craft solutions we can create policies that stand the test of time. And being perfectly honest, that's why I'm disappointed that we're here today discussing a number of partisan bills that were dropped at the eleventh hour when the committee has a partisan a bipartisan proposal already drafted that they're choosing to ignore. I think it's unfortunate that ma- that the majority would rather draft their own bill behind closed doors than find true bipartisan bipartisan consensus working with everyone on this committee. I know members on both sides there want to work on the best solution here, and I know that they know that the only chance Representatives Horsford and Miller have been working diligently for over a year to craft a sensible bipartisan solution. That's the pro pro proposal that we should be considering at this hearing today. A bipartisan path forward is the only way we can ensure the changes we make to the tax code are durable. And when it comes to changing the tax code, durability should be one of our top priorities, to give certainty and clarity as people plan for the future. We should be focused on improvements to address some of the outstanding questions for adapting the tax code for digital assets that make sense and clear b clear barriers uh for people in this space we should be focused on providing clarity to taxpayers and to companies so everyone knows what is expected of them and what they can expect when it comes time to file and the industry is able to grow as mister Miller said here in the United States we should be focused on reducing or streamlining unnecessarily burdensome paperwork, where it makes sense. We should be focused on providing parity where it makes sense to, and put up guardrails to prevent abuse without curtailing digital assets entirely. We can thread this needle. We can find common ground on how to best address these issues if we are targeted and if we work together across the aisle. And I wish that's what we were doing today in this hearing, looking at a bipartisan proposal. With my little bit of time left, let me uh turn to you, Mister Kirchherr, and uh you've spoken about some of the concerns What in your view, in these proposed bills or what might be left out, what concerns you most? What haven't we touched today that we need to, what should we be focused on as we walk away today, uh, considering our next steps?

I think given the, like, um, the mobile nature of the assets and the risk of tax non-compliance, when you don't have good information reporting, and the attendant concerns about money laundering, illicit finance, and other nefarious activities, including drug trafficking the real focus or a good use of focus would be trying to solve that problem through whether it be tax reporting or additional aml kyc type rules but really closing the remaining digital tax gap and also uh reducing the risks of illicit finance and other nefarious activities that would be a really good use of the members' time.

you know i i appreciate that you know my concern is uh if we let the nefarious activities consume us if it rises to crisis or it's it's what's on the front uh pages of of the news, it takes us away from focusing on the policies that will move us forward in a in a in a positive way. Uh I'm gonna do something unusual, I know the hour is late and everyone's probably tired, I'm gonna yield back almost a minute of my time, I yield back.

Gentlemen yields, I now recognize myself for five minutes. Thank you to our witnesses for being here today. In twenty twenty five digital asset market capitalization totaled three trillion dollars. These estimates show up to thirty percent of American adults own digital assets. Under their current tax code, digital asset users face high administrative burge- burdens and opaque guidelines. Additionally, anti-abuse rules that apply to traditional finance assets do not clearly apply to di- to digital assets. That creates opportunities for misuse. This committee has spent the last year working with various parts of the digital asset industry to understand the unique challenges consumers face, in the existing digital asset tax structure. As conversations around the treatment of digital assets used in everyday commerce progressed, it became clear that a stable coin only approach would not suffice. I'm proud to lead the less pap less tax paperwork for Digital Asset Owners Act, which includes the option for taxpayers to select a simplified accounting method for one or more widely traded digital assets. This is a common sense change to streamline the reporting process and alleviate unnecessary administrative burden. This simplified accounting method ends the requirement for filing a form ten ninety nine DA for every single digital asset transaction. Mister Somen Sato, CoinCenter has argued for years that every crypto hol everyday crypto holders shouldn't have to track the basis of every fraction of a coin across hundreds of transactions. Instead, they should be able to just pay tax on the net change in value over the course of the year. How do you think the simplified accounting method will affect taxpayers?

I think conceptually it offers uh a really valuable option in terms of simplifying the process by which an everyday crypto user can uh you know, simplify their their their tax payments. Um I think that uh I wanna spend more time to just kinda make sure I understand like exactly how it would work in practice. thing i would point out for your consideration is is perhaps that the uh treating all of the gains as short term capital gains might be a touch too punitive for comparison sakes um uh you could uh invest in a bitcoin perpetual future right now that trades on a cftc regulated exchange and the the code would treat that as uh sixty percent uh long term games and forty percent short term and those are essentially from a price exposure equivalent assets as tracking the price of Bitcoin in a financial instrument versus actually just holding Bitcoin for example. But otherwise, going back to your original point, I think it's really important to uh think of these solutions which I think are frankly creative, right? This is something that might be uh a unique offering uh in the crypto ecosystem but one that ensures that you know the individual can continue to participate in the way that we think that they should be able to.

Because wouldn't you imagine if you didn't have to calculate the gain or loss on, let's say, a a two dollar transaction, you don't have to calculate gain or loss on the basis of, you know, those that two dollar equivalent in digital assets, it would be much simpler and easier to use?

Yeah, I definitely do. And I think that that would be uh Ultimately, the the interesting decision be would be to see how taxpayers engage with that, to see w- to what extent they would be taking on that election. But I think uh, at least anecdotally, my experience is that simplicity is kind of what most

Mm, thank you. Uh, Mister Kirscher, uh, you and the Tax Law Center have advocated for an alternative method of accounting, uh, such as mark-to-market as a solution for administratability concerns in lieu of broader de minimis proposals. Do you see this simplified approach, uh, simplified accounting method as consistent with your recommendation?

In concept, it's absolutely consistent and it has the potential to reduce administrative burdens while not providing new kind of other integrity

Thank you. The bills we're considering today make meaningful changes to provide clarity to consumers to businesses and to other stakeholders that work with digital assets. Creating more clarity defined in a defined tax structure will lead to reduced administrative burden as well as better compliance. That's essential to fostering innovation and allowing digital assets to thrive in the United States.

Mister Chairman, thank you very much, and ranking member. Uh, and thank you all for staying till the very bitter end, you'll discover the halls are empty when you walk inside the door. Um, I Mister Kirchherr, in your analysis of the less taxed paperwork for Digital Asset Owners Act, you discussed the challenges the IRS is gonna have in the proposed mark-to-market regime for non-stable coin digital assets. And you mentioned that the IRS has lost about a quarter of its staff, three quarters of its leadership in the last year and a half. We have had the acting director in here a number of times, pushing him pretty hard, uh just about the depleted capacity to write timely guidance and carry out the enforcement functions. So, just general, if, if they don't reverse the cuts to the IRS, what would you expect the results to be? How? How much trouble is the IRS gonna have implementing the proposals? Sh and sh could we see more evasion and abuse as a result?

I think without proper funding it makes it harder for treasuring the IRS to implement any new law, and that's a combination of the guidance but also the systems necessary to implement simplified reporting and other kinds of things. Absolutely on the enforcement side with reduced resources you'll almost certainly see uh reduced revenue as well. My first job at the IRS,

Should we consider asking the GAO to look into the capacity of the IRS, and their recommendations?

Uh, GAO or TIGTA I think would be very appropriate to ask those kinds of questions to. I mean, there is a question of what the where is sort of the breaking point is and what is and isn't possible on a, reasonable time frame and what the tradeoffs and risks are of trying to move something without having the resources there to actually do it.

Great, thank you. And Miss Riley, first of all, th- thank you, when I signed on to the No Stock Trading Act four years ago, I had to sell the stock I had. Thank goodness Fidelity was there, um, to - to give us that - that cover, um, and - and a good place to invest too. The End Digitals Asset Tax Shelters Act was intended to curtail the t- tax dives where we've seen the crypto investment in Puerto Rico, um misusing their Act sixty. Um it's been interesting looking at Representative Velazquez has legislation that would insure that any sale of digital assets or stake in a digital asset is treated as US sourced income insuring that all sales of digital assets are taxed at the full US capital gains tax rate. The legislation we had before is just slightly different in that it says that it's considered US sourced unless the gain is taxed at a rate of ten percent or more in Puerto Rico. Um, we assume that Puerto Rico would modify its tax code to be at least ten percent, but there still could be incentive for investors to take advantage of the difference between the new Puerto Rico tax rate and the US capital gains tax rate, which is twenty percent for for long term at least. What are your impressions about both approaches? What's where's the wiser way to go?

Um, thank you Congressman um for the question. And I I think that is something that we are looking into and thinking about. This is certainly a

I agree. Thank you.

Thank you.

Thank you very much. And, Mister Kirscher, the, talks a lot about mining and staking and the tax clarity for mining and staking act. Um, As you mentioned, this creates a variety of problems. The the the principle of parity among asset classes, which I confess I know is very complicated just listening today. The administrability challenges, the potential for abuse, and there's also the the J the Joint Committee on Taxation says three billion dollars over ten years, which uh we're supposed to be the responsible ones here fiscally. My colleagues, Mister Horsford and Mister S Miss and Mister Miller, have a different approach in their parity act. And it then in the amendment before us today, which allowed deferral for up to five years rather than ten years. Uh, but there's even concern about that. Did you notice that every time we get close to the five years being up, um, the the excellent lobbyists come in and convince us to kick the can down the road. We saw in the with the TCJA, we've seen that, the OBVBA. What's your concern about whether Mr. Horsford's bill, which I very much support, with five years, that the five years would actually be five years?

There's obviously the political question that you're describing, of whether it actually stays and lands for five years. I think there are ways to make sma- like relatively small modifications to that bill to make that kind of irrelevant you could do an interest charge or something, to provide full parity. I think that the the pari- the Digital Parity Act is very close to full parity today, but if you added an interest charge it would probably be true economic parity and that puts less pressure on that question.

Great. Thank you very much. My time's up, but now you're back. Thank you.

Gentlemen yields, uh the Chairman now recognizes Mister Horst for five minutes.

Thank the Chairman uh for yielding and it's been a good productive afternoon. And first, we've heard broad agreement throughout today that taxpayers deserve clarity. Uh the question is not whether we modernize the tax code, the question is whether modernization is grounded in parity, fairness, and economic reality. Uh, we should fix genuine compliance, uh, challenges. We should also support innovation. And I believe that we can do both of those things while not creating a tax advantage, uh, that is unavailable to, uh, certain taxpayers, uh, other investments or other forms of income. Congress should reward innovation. not tax arbitrage. For the past year, uh, Representative Miller and myself, as well as our dedicated staff, have been publicly working on digital asset taxation legislation. There are three principles that grounded our work and will be my focus of of my questions today. First is on digital assets. They should have parity with existing financial instruments. where there is uncertainty, we need to address that. Second, we need to solve uh for the problem or excuse me, solving that problem should not create another problem. We cannot create special tax loopholes. And third, we must ensure that any benefits reflect economic reality. For this package to stand the test of time, it must be fair, administrable, and resistant to abuse. I want to thank Chairman Smith uh for adding my amendment that includes those changes that I've been advocating for. And let me be clear, the changes that I'm asking for have been publicly vetted and socialized with stakeholders. These are the minimum to get my support for this package. But there are still more changes that must be done to get this policy right and several of you have identified some today. As the Chairman has said, we are not we are on the one yard line, and if we we want to meaningfully do this together, we have to work together to accomplish that. But let me start with validation rewards. Under current law, when someone receives a validation reward and can use it, sell it, or control it, they generally owe tax on it at that point. Is that correct, yes or no? All the panelists, very quickly.

Yes.

I would disagree that the law as applied is correct right now.

Okay.

Um, I agree, I agree with um, Mister Zawken's explanation.

Thank you. For the past year I've heard concerns about people owing tax before they have practical access to cash from those rewards to pay the tax. Some have referred to this as a phantom tax. I think that is a fair concern. The question is how Congress addresses that concern without creating a new loophole. Um, yes or no, is phantom income and liquidity concern a major issue that Congress needs to address when it comes to validation rewards?

Um, Congressman, I agree with that. I think it is an issue. I think liquidity is an issue and a major reason why I endorse um some of the proposals that you've come up with. Thank you.

Uh, and Congressman, um, I believe that there are issues in determining when there is appropriate dominion control, and it presents

Mister Karcher, can Congress address the liquidity concern without creating a system where someone can delay paying taxes indefinitely?

Yes, I think that sort of short time limited deferral can address liquidity without um permanent or indefinite deferral, that's certainly the case. That would still be a little bit different.

And if Congress created that kind of unlimited deferral rule here, would that be more favorable tax treatment than what most workers receive on wages, or what ordinary investors receive in a four O one K, for example?

It would be definitely more favorable than wages which are taxed immediately. It would be more favorable than any stock held in a brokerage account, and it would probably be more favorable in many cases than

Very quickly, uh with the indulgence of the chair, I just wanna ask about uh charitable deductions. Um I'm not here to oppose charitable giving, I wanna make sure that the deduction reflects the real economic value the charity can actually receive. Mister Karcher, at the end of the day, isn't it the clearest measure of value what a charity is actually able to receive when it sells an asset?

Yes, using the third-party market transaction is the best price discovery we have.

Yeah, Congress has dealt with valuation disputes for years involve involving hard to value assets, and that's why we need to get that portion right. Uh, I'll just close by saying if Congress does nothing, regulators, courts, and off-shore markets will define the rules instead. Inaction is not neutrality. It means uncertainty. It means taxing the syst system. uh fragmented enforcement and exploitation by wealthy and sophisticated actors at the expense of everyday consumers. That's what we are working to achieve in the parity act and I hope with the majority's indulgence we'll be able to get to those larger policy goals, so that we get this right. We don't just get it done. Thank you, Mister Chairman, and I yield back.

The gentlemen yields. I would like to thank our witness witnesses for appearing uh before the panel today. with the panel. Uh, please be advised that uh members have two weeks to submit written requests and be answered later in writing. Those questions and your answers will be made part of the formal hearing record. With that, the committee stands adjourned. Thanks, well, okay, I'm all