▶ 0:21:19Chair Crapo: The committee will come to order. In recent years, digital assets emerged to become an important part of our global financial system. We will discuss how our tax code can provide a framework to ensure american leadership in this innovative industry. We are not starting from scratch.
▶ 0:21:44Chair Crapo: Over two years ago this committee laid the groundwork for a strong bipartisan foundation when ranking member wyden and I jointly released a public request for information on how congress should address the challenges and opportunities presented by digital assets. The robust input we received showed significant uncertainty exists and congress should update tax code to provide clear and durable rules of the road.
▶ 0:22:13Chair Crapo: Since receiving that input, the market cap of digital assets has continued to rapidly increase and additional questions have been raised by the industry. Many colleagues on both sides of the aisle understand these challenges and have put in significant work to develop thoughtful solutions. This summer, congress passed on the president signed into law the g.e.n.I.U.S.
▶ 0:22:36Chair Crapo: Act which establishes a first of its kind framework for payments an important step for the american leadership in financial innovation and economic opportunity. As congress considers additional steps to further develop the digital asset architecture, the tax treatment of these assets and transactions is a necessary part of that framework. Currently our tax code does not provide strict -- straightforward answers for digital asset transactions.
▶ 0:23:06Chair Crapo: Whether someone is buying a cup of coffee, donating to a charity, mining or staking. Without clear tax rules taxpayers are left with many unanswered questions and individuals, businesses and our country's finances bear that burden. Lingering tax uncertainty makes the U.S. a less attack -- less attractive place to do business and hurts tax compliance. The U.S. must not fall behind in this rapidly growing market.
▶ 0:23:36Chair Crapo: It should be a leader in digital asked at development. Recognizing these challenges, the trump administration has rightly prioritized the examination of the current tax treatment of digital assets. During its first week in office, president trump issued an executive order recognizing the crucial role digital asset industry plays in the U.S. innovation.
▶ 0:23:59Chair Crapo: In addition, the critical role it plays in economic development and international leadership. That executive order established the president's working group on digital assets which published a report titled strengthening american leadership in digital financial technology.
▶ 0:24:20Chair Crapo: The report includes tax legislative proposals regarding the mark to market election, treating safe harbors, securities and the wash, sale and constructed sale for digital assets. The report also includes tax recommendations dealing with payment stable coins. These are novel and complex topics. I thank our witnesses for being here to better understand them.
▶ 0:24:46Chair Crapo: I look forward to learning from you and hearing how congress can take steps to develop proper rules of the road for digital asset taxation to ensure U.S. leadership in this rapidly evolving industry. As we will hear from our witnesses, the cryptocurrency ecosystem is diverse in its products and functions and our tax code must appropriately adapt to reflect the more comprehensive and durable approach.
▶ 0:25:16Chair Crapo: I trust the bipartisan foundation this committee has built will result in solutions that meet that challenge.
▶ 0:25:21Sen. Wyden: Thank Mr. chairman. Mr. chairman and colleagues, 10 hours into a government shutdown and americans are wondering this morning how they >> and to afford groceries, pay rent and even cover the transportation costs they face today.
▶ 0:25:46Sen. Wyden: The republican response to them, silence. With so many people being hurt by the shutdown and desperately worried about the hardships to come, I think it is so unfortunate the republicans are making their warped priorities clear. I will start with a few facts.
▶ 0:26:16Sen. Wyden: The federal government is shut down while republicans control the house, the senate and the white house. Rather than going forward in good faith, the administration is engaged in hostagetaking threaten people's livelihoods. Just about everything except finding a solution. Republicans do not make any real effort to hold trump to his promises or to stick up for federal workers.
▶ 0:26:46Sen. Wyden: They just rubberstamp whatever chaos the trump administration inflicts on the country. No matter the cost. So millions of americans now are facing a huge increase in their health care premiums. This is the real world of the suffering we are seeing this morning. The trump administration, republicans won't lift a finger to help.
▶ 0:27:13Sen. Wyden: Resolving this shuts and getting our fiscal house in order really ought to be the top focus now of the finance committee. Unfortunately there has not been a single hearing on the $5 trillion tax bill that passed a few months ago. Biggest bill in history, not going to discuss in a bipartisan way. The economy showing real signs of weakness.
▶ 0:27:41Sen. Wyden: Prices are higher, millions of americans are about to get clobbered with health care costs. I do agree with the concept of working on crypto's treatment under the tax code, it is a worthy subject. I fought back against proposed rules that went too far towards dictating what co-independent developers not exchanges or brokerage would be forced to write.
▶ 0:28:06Sen. Wyden: But in my view, I say that this morning, my colleagues on all sides, it's a pretty long list of major issues for this committee that's got to look at first. As for the topic at hand there are a lot of questions that deserve consideration when it comes to crypto and taxes. Right now there's a severe lack of certainty and clarity on how tax rules applied to crypto. That's bad for just about everybody except the tax cheats.
▶ 0:28:35Sen. Wyden: One of the effects of that uncertainty is a big increase in the tax cap. Taxes go unpaid every year. In the first trump administration, the irs commissioner sat in this room and testified a real gap might be double the official estimate because of the shadow rules around crypto. That would make the tax cap almost $1.4 trillion per year. If the U.S.
▶ 0:29:01Sen. Wyden: Actually collect the taxes these digital corporations owed that would go a long way to fisk -- fixing our fiscal challenges. There are a lot of other issues to consider. This is a new and rapidly transforming industry. Including how to treat crypto firms the for all intents and purposes are basically like sports gambling companies.
▶ 0:29:26Sen. Wyden: The senate needs to handle these carefully and take the time to get it right, that will be a challenge I certainly hope the senate looks at this in a bipartisan way. Right now, what is most important is that we stand up for people who are suffering. All over america. Thank you Mr. chairman.
▶ 0:29:46Chair Crapo: Thank you ranking member. This hearing is about crypto I have to respond briefly to the effort to relitigate the one big beautiful bill. The bottom line is yesterday the republicans voted to keep the government open and the democrats insisted on over a trillion dollars of new spending in order to do so.
▶ 0:30:10Chair Crapo: We will continue having that debate, but today we will go forward with our witnesses and discuss the issues that we deal with regarding taxation of digital assets. In a moment our witnesses will share their opening statements. Before doing so I will provide a short introduction of each witness. Mr.
▶ 0:30:30Chair Crapo: Somensatto is the director of policy at coins center, a leading nonprofit research and advocacy organization focused on cryptocurrency and decentralized technology. Prior to joining coins center he held senior roles in public and private sector focusing on regulatory treatment of cryptocurrencies. Ms. kramer is the founding member of askramer law llc.
▶ 0:31:07Chair Crapo: She has also authored a two volume 4000 page reference, financial products, taxation regulation and design now in its fourth edition. Mr. zlatkin is the vice president of tax at coinbase. He took on his role following a career of nearly 25 years at the general electric company and as a tax lawyer at a number of U.S. law firms. Ms.
▶ 0:31:35Chair Crapo: Nellen serves as the chair of the american institute of cpas and digital assets task force. She is also a professor at san jose state university teaching graduate level tax courses and directs the university's high tech tax institute and tax conference. She was previously with the irs as a revenue agent and instructed in private practice. We will begin with Mr.
▶ 0:32:08Chair Crapo: Somensatto's opening statement followed by Ms. kramer, Mr. zlatkin and Ms. nellen.
▶ 0:32:14Mr. Somensatto: Chairman crapo, ranking member wyden, thank you for the opportunity to testify today. I'm the director of policy at coins center, a nonprofit focused on public policy issues facing cryptocurrency. Coins center is not a trade association, we do not represent any particular company, center of ecosystem or crypto network.
▶ 0:32:39Mr. Somensatto: Our work is focused on informing policymakers how to approach this technology in a way that upholds constitutional principles, safeguards of civil liberties. On today's topic, coins center has called for sensible and fair tax policy that protects the right of individuals to build, use and benefit from launching networks. We do not seek special treatment but the rules that align crypto transactions with comparable activities under the law.
▶ 0:33:08Mr. Somensatto: This hearing presents an opportunity to address the current obstacles to that treatment. Why act now? Since the introduction of bitcoin in 2009, millions of people including U.S. taxpayers have used open block chain networks to send peer-to-peer payments and to conduct a wide variety of other activities. These networks are not going away describing the billions of value transferred each day.
▶ 0:33:37Mr. Somensatto: They are facing increasing demand to transfer -- transform significant portions just as commerce moved onto the internet starting in the 90's. The tax treatment of crypto transactions is often uncertain, in practical and fundamentally misaligned with well-established principles and tax law. The resulting burden falls not only on institutions but on individual users. Those least able to afford specialized tax advisors.
▶ 0:34:08Mr. Somensatto: Sensible tax reform is essential for U.S. competitiveness and ensuring these networks are built with democratic values. Whenever american bitcoin or a theory of staker's suffers unnecessarily complex, when an american solana users faces a company with surveillance. We are not expensing handful of early adopters we are seeing the future of financial infrastructure to rival nations. Congress can offer a better alternative.
▶ 0:34:41Mr. Somensatto: One with clarity, fairness. So how do we improve the tax environment around crypto? My written testimony focuses on recommendations coins center has championed for years. Let me briefly explain each. First, the irs treats cryptocurrencies properly. Every time a user sends crypto to buy a coffee or pay a transaction fee, may trigger a complex taxable event.
▶ 0:35:11Mr. Somensatto: This is comparable to tax obligation every time you send an email or text message. Congress saw a similar issue with foreign currency and created a $200 de minimis exception. Of comparable fix for crypto would go a long way. We urge congress to clarify the newly created tokens earned by minors and staker's for validating transactions. The only tax upon disposition.
▶ 0:35:42Mr. Somensatto: Irs guidance incorrectly treats these tokens as gross income upon receipt. The reality is these tokens are not received but are created property just as crops by farmers or apps by developers. The current irs approach misaligned crypto with other taxpayer created property. Congress should clarify block rewards are only taxable when they're exchanged.
▶ 0:36:08Mr. Somensatto: That would align the law with economic reality and prevent honest taxpayers from being penalized for participating in a network consensus. Third, the 2021 infrastructure act extended section 6059 of crypto. The provision requires anyone receiving over $10,000 in crypto to collect and report detailed personal information about their counterparty in a peer to peer transaction.
▶ 0:36:34Mr. Somensatto: We challenge the constitutionality of this provision in federal court and we urge congress to repeal or amend it to avoid chilling legitimate private uses of the technology. The promise of cryptocurrency lies in its ability to empower individuals in an open decentralized innovation. But that promise cannot be realized if the tax code places unfair burdens on people working to build and use these tools in good faith.
▶ 0:36:59Mr. Somensatto: Congress has a opportunity to modernize the tax code, protect everyday users and ensure the united states or means a leader in this technology.
▶ 0:37:13Chair Crapo: Ms. kramer.
▶ 0:37:16Ms. Kramer: Good morning and thank you for inviting me to join you for this important discussion. By way of background my law practice relates to products and derivatives, I wrote the treaties and the adjunct professor at northwestern law school for 20 years and have conducted workshops for irs financial product specialists for over 20 years. It is my privilege to share with you.
▶ 0:37:46Ms. Kramer: The existing tax framework send out internal revenue code is flexible enough to accommodate digital assets with some clarification and residual gaps filled in by congress. Digital assets are a new asset class with unique transactions never contemplated before. But this is not the first time the U.S. -- a new asset classes available for trading nor the first time the code has been applied to a new asset class.
▶ 0:38:14Ms. Kramer: In moving forward we need to keep in mind the precedent we are sending for the new asset class and the next one after that. As jason said, the irs is repeatedly confirmed in pronouncements the digital assets or property. In the tax code determines tax character timing and sourcing for property.
▶ 0:38:34Ms. Kramer: Tax character is either capital ordinary, timing will be based on your accounting method and when you have dominion and control with the free use of the property. And source, a geographic location where the services are performed and the income is earned. Many digital assets also fall into the category of commodities while a few are securities.
▶ 0:38:58Ms. Kramer: Although stock and securities is defined in the code, without a code definition of commodities the irs has generally deferred to the cftc as to what constitutes commodity. We really need a cold definition. Let's turn to my reports. The code tells us gross income is income from whatever source derived. To have gross income a taxpayer must have an exception to wealth.
▶ 0:39:25Ms. Kramer: That is clearly realized and over which the taxpayer has complete dominion and control. What does this have to do with miners and staker's for adding blocks to a chain or validating transactions? Under current tax law they are taxable upon receipt once they have dominion and control. The awards are compensation for services.
▶ 0:39:49Ms. Kramer: When a minor or staker is blocked to a block chain or validates a transaction and subsequently sells those rewards, the second transaction is a separate taxable. They've also been questions about applying the mark to market rule under 475 to digital assets. At present, actively trading digital assets or commodities for purposes. But how is actively traded to find and which digital assets meet this definition?
▶ 0:40:18Ms. Kramer: Congress needs to broaden guidance or taxpayers can look into market as either commodity dealers or traders. The scope of actively trading is unclear and congress needs to clarify when digital assets are commodities in the code and what actively traded means.
▶ 0:40:39Ms. Kramer: If digital assets are a new category it should made elective for traders and tailors to provide tax parity between digital assets in all the other commodities. Let's finally consider the appropriateness of the de minimis exception. Precedent for this is available for personal use foreign currency transactions.
▶ 0:41:03Ms. Kramer: The rationale for the foreign-currency exemption does not apply to digital assets because people do not need to pay for a cup of coffee with crypto, tourists abroad have to buy things in the local currency. A de minimis exception won't solve the record-keeping and obligations because taxpayers still needed to keep track of all their transactions in order to demonstrate their compliance.
▶ 0:41:31Ms. Kramer: If congress decides to provide a de minimis exception it would provide a tax subsidy to encourage crypto investments. So the bottom line is congress needs to provide taxpayers with guidance as to the taxation of digital assets, clarifications needed in key areas. But congress has the internal revenue code to build off of and it is a great framework to work off of.
▶ 0:42:00Ms. Kramer: The irs is not in a position to handle these issues themselves and so with that I would like to thank you and tell you what I think about cryptocurrency.
▶ 0:42:12Chair Crapo: Thank you very much. Mr. zlatkin.
▶ 0:42:21Mr. Zlatkin: Chairman crapo, ranking member wyden, members of the committee thank you for this opportunity to testify. I'm the vice president of tax at coinbase, america's largest digital asked institution. The market is no longer small or experimental it is 4 trillion global economy. One that americans use every day whether to instantly send money across borders, for local financial networks or to store value.
▶ 0:42:53Mr. Zlatkin: Other countries have clear rules to track this activity but here in america our tax code treats digital assets as generic property as if nothing had changed in over a decade. The gap creates confusion, discourages investment and risks driving jobs and capital offshore. The guiding principle is simple, parity with traditional funds. The same tax rules should apply to the same economic activity whether it involves commodities, stocks or tokens in the block chain.
▶ 0:43:24Mr. Zlatkin: Right now that parity does not exist. The lack of tailored rules has real-world consequences. One is inconsistent outcomes. Owning rewards for securing a network. Two people can do the same thing one through U.S.-based service, the other through a service overseas. Today the first may be told there ward for withholding taxes while the second may not. Taxpayers should not get different answers to the same question just because they clicked on a different website.
▶ 0:43:56Mr. Zlatkin: Another friction is capital formation. Financial personnel wants to lead digital assets and improve market liquidity. If they were lending stocks or bonds that would be tax-free under well-established rules. With digital assets this could be true with a sale. The result, the deal is more expensive or does not happen at all. Our tax code should reflect that. And then there was personal privacy. Picture an ordinary american using a stable going to buy a cup of coffee.
▶ 0:44:27Mr. Zlatkin: Under these rules that must be tracked and reported from a tax form. Requiring taxpayers to monitor documents is intrusive and inconsistent with any reasonable expectation of financial privacy. The g.e.n.I.U.S. act regulates there is no greater loss for the stable coin as a payment tool. The tax laws, americans should not need a tax account to buy a top -- a cup of coffee. The U.S.
▶ 0:44:56Mr. Zlatkin: Is losing ground, other jurisdictions have clear tax rules for digital assets. Businesses may choose to locate abroad instead of here along with jobs, capital and tax revenue all because our rules are not clear. These are not hypothetical problems, they are happening now and undermine our ability to complete -- compete globally. That's why my testimony highlights 10 priorities for reform.
▶ 0:45:25Mr. Zlatkin: Local reporting that exclude stable coins and transactions. Extending tax-free treatment to digital asset loans, clarifying source for staking rewards. Creating a safe harbor for digital assets. Ensuring retirement funds are not penalized for staying. Managing partnership rules for exchange driven funds.
▶ 0:45:51Mr. Zlatkin: Establishing -- for digital assets and applying wash sale rules to digital assets because parity means no special loopholes. Many of these reforms can be advanced with regulatory tools, notices and rulings. We are encouraged by the strong signals by the administration including the announcement yesterday that they are prepared to act and we thank them for their leadership.
▶ 0:46:19Mr. Zlatkin: But legislation is the most durable and it is time for congress to act. Looking forward block chain itself could be part of the solution. Tools could be more accurate less costly and protector of taxpayer privacy. These proposals are not about special treatment, they are about parity with traditional finance. The factor industry supports wash sale parity is proof we are serious about integrity, compliance and fairness. The stakes are high.
▶ 0:46:51Mr. Zlatkin: Done wrong tax policy will bring confusion, higher costs and capital flight. Done right it will protect the tax base and innovation and preserve america's role as world financial leader. Crypto is here for good, 4 trillion dollars strong and now is the time to make our tax rules up to speed. Thank you and I look forward to your questions.
▶ 0:47:14Chair Crapo: Thank you. Miss nellen.
▶ 0:47:17Ms. Nellen: Good morning chairman crapo, ranking member wyden and members of the committee. I'm chair of the digital asset task force and professor and director of the graduate tax program. I am pleased to have the opportunity to testify on the taxation of digital assets.
▶ 0:47:40Ms. Nellen: Despite the growing importance of digital assets and the increasing number of taxpayers using them, there is a lot of uncertainty and lack of clarity when it comes to digital asset tax issues. Since the initial guidance in 2014, the number and types of digital assets and uses has grown and continues to do so.
▶ 0:47:59Ms. Nellen: Digital assets include not only bitcoin that was the initial focus of guidance but numerous cryptocurrencies, stable coins, tokenized assets and non-fungible tokens. This has further complicated the taxation of digital assets because some closely resemble securities, some resemble commodities and others do not resemble either. Carefully defined terms will be critical and any extension of existing revisions to digital assets.
▶ 0:48:27Ms. Nellen: For example, we recommend mark to market accounting be extended to dealers and traders of digital assets under the section 475 framework. The intent of mark to market accounting was to simplify tax compliance for assets with a value that can be readily determined. There are many assets that are readily determined and traded on multiple digital asset exchanges.
▶ 0:48:52Ms. Nellen: To extend that to dealers and traders of digital assets congress needs to know which assets would be eligible and specify the types of activity that would make a taxpayer deal in digital assets. Narrowly defining actively traded fungible digital assets as those traded on one or more domestic digital asset exchanges would treat them similar to certain securities and commodities.
▶ 0:49:18Ms. Nellen: This narrowly defined subset of actively traded digital assets could be used for other code sections with securities and commodities. Importantly the standalone definition would circumvent the need to determine whether specific digital asset is a commodity, security or other assets. For example, congress could leverage this definition when considering a safe harbor under section 864.
▶ 0:49:43Ms. Nellen: The legislative history of section 864 indicates congress believed it would encourage foreign investment in the U.S. and would keep trading activity in the U.S.. This would seem to apply to other investment assets including digital assets. Another tax issue that needs to be resolved is application of the qualified appraisal exception for charitable contributions of certain digital assets. This exception assumes certain types of assets have reliable and publicly available values.
▶ 0:50:14Ms. Nellen: Therefore they should not require the expense of hiring a qualified appraiser to determine the value of donated property, publicly traded securities are among the few types of property available for this exception. Because not all digital assets are actively traded on digital asset exchanges, the appraisal exception should not be extended to all digital assets and overly broad extension may lead to overly valuations of assets with speculative values.
▶ 0:50:43Ms. Nellen: The qualified appraisal exception should be limited to actively traded fungible digital assets. This aligns with the intention and options offered under public securities which is to make the contribution process simpler and less costly and were any possible abuse is unlikely. These issues do not reflect all digital asset tax issues and great -- great great uncertainty for tax professionals. Some are more complex than others and some have found arguments on each side.
▶ 0:51:13Ms. Nellen: For some issues a legislative rule is needed for consistency in areas where one more possible situation exists. We've addressed additional issues in a written testimony. Ultimately we see guidance that provides clarity and certainty.
▶ 0:51:30Ms. Nellen: Certainty of the tax consequences and reporting obligations from digital asset transactions will prove the tax system not cause people to avoid transactions that otherwise make financial sense and lead to consistent application of tax rules among all taxpayers. The taxes and benefits from clear laws everybody plays by the same rules and can meet compliance obligations with confidence. Tax administration is more efficient. This is what we requested when it comes to taxation of digital assets.
▶ 0:51:59Ms. Nellen: Thank you for the opportunity to testify and I'm happy to answer any questions you may have.
▶ 0:52:03Chair Crapo: Thank you very much and again thank you to all of our witnesses. Your testimony as well as your oral testimony and written testimony. Shows how complex this issue isn't how critical it is looking at your expertise and getting it done right. I have a lot of questions but I will go into a couple of them. First, Ms. kramer this is for you.
▶ 0:52:31Chair Crapo: If I understood your testimony correctly you said you have some concerns about our de minimis rule, I'm not sure if you're concerned whether to have the do minimum provision or that we need to get it exactly right. Could you explain what you were saying there?
▶ 0:52:46Ms. Kramer: In my written testimony I did go to some length about it, the problem with a de minimis exception is that if there's a way there can be abuse and people can take advantage of it. That is really with the concern is.
▶ 0:53:10Ms. Kramer: So talking about setting the maximum number, having income level, having a maximum number of dollar amounts. And so if there is going to be a de minimis exception provided through digital assets it needs to be crafted in a way that is probably more specific than the current exception that we have for foreign currency.
▶ 0:53:37Chair Crapo: Thank you very much. Mr. somensatto do you agree with Ms. kramer.
▶ 0:53:45Mr. Somensatto: Our position is that the minimum exception would make sense for this asset class. Ms. kramer mentioned in her opening statement the kind of difference with currencies where you are required to pay in a foreign country without foreign currency. I am not sure that's the policy justification that underlies the foreign currency exception. To me these assets you go back to the white paper and the concept here is to create a publicly available form of digital cash.
▶ 0:54:18Mr. Somensatto: To allow individual users to take advantage of what broadsheets allow for which is this peer to peer value transfer , you need to have a situation where the tax burden does not make it completely impossible to conduct transactions in that manner. So I think there are ways to craft a do minimum exemption that would cover questions about abuse.
▶ 0:54:43Mr. Somensatto: But for example just real quick when you pay for a transaction in stable coin you have to pay a fraction of a cent in the native asset as a transaction fee. Those fractional sent transfers are subject to the same tax and those of the types of difficult tax requirements that make it nearly impossible for individual users to use it.
▶ 0:55:06Chair Crapo: Thank you very much. Mr. zlatkin to emphasize parity and I agree with that. I would like to ask you to maybe explain in a little more depth while you believe parity is so critical and add to that, your final comment towards the end of your testimony that we need to have congress get this right not just continue to rely on administrative guidance from the irs.
▶ 0:55:40Mr. Zlatkin: Otherwise penalized compared financial services. We should not be penalized compared there are a lot of rules for financial services that create clarity and durability and those are applicable to coinbase and other similar institutions. I think financial parity is something that will be advocated very strongly.
▶ 0:56:09Mr. Zlatkin: It puts in a level playing field with the rest. As to your second question about administrative guidance versus law, my own view is the only durable way to create a foundation for digital assets is to clarify aspects of the law that are unclear.
▶ 0:56:30Mr. Zlatkin: Certainly we've approached the irs and the treasury, they have been very accommodating in many instances sometimes they've been inaccessible in prior years but the only way to create a durable system functionally to last is law.
▶ 0:56:46Chair Crapo: Would you like to comment on either the do minimum issue or on the parity issue or any other issue you think should be prioritized?
▶ 0:56:54Ms. Nellen: Just a note, the issue of the parity, when you have rules like from mark to market, lending where you are referencing securities or commodities, without any specific rule where the digital assets fall it can then fall upon the tax practitioner, often a nonlawyer to figure out might this digital asset fall in those categories to avoid that and then you end up with inconsistencies in
▶ 0:57:25Ms. Nellen: Interpretation if there was a category of digital assets that actively traded on an exchange to be added to those provisions then to have the definitive answer of yes I can identify this digital asset falls into that category. It does have consistency with securities commodities in certain digital assets.
▶ 0:57:45Sen. Wyden: Thank you Mr. chairman. Miss nellen, thank you very much for repeatedly mentioning mark to market. In our billionaire income tax legislation which has the support of 22 united states senators, that is one of the key concepts. Making it clear it is a regularized part of the tax code. Let me go to you Ms.
▶ 0:58:09Sen. Wyden: Kramer on to minimum because this is going to be one of the hotly debated aspects of this whole effort. I want to make sure we are walking this through carefully. So everybody gets a sense of where we are. When you use a digital asset to make a purchase you trade again or a loss just like a stock.
▶ 0:58:36Sen. Wyden: Congress creates that for foreign currencies so taxpayers aren't burdened with tracking gain on personal transactions for currency abroad. This is where it gets I think into the debate, it's been suggested there be a similar exclusion for digital asset transactions subject to an annual cap.
▶ 0:58:57Sen. Wyden: The question is even if there were to be aid to minimum exclusion for the cap, would you still need reporting so taxpayers know their gains on the transaction to make sure they don't get in trouble with the cap.
▶ 0:59:17Ms. Kramer: They would need to keep track of the transaction to keep compliance. It really wouldn't make a difference.
▶ 0:59:26Sen. Wyden: Will have to get some more questions about that in writing because it strikes me even if you go forward to minimum with a cap there will be some other aspects to this issue. Let me ask about mining and staking, unrestricted stock for services is that ordinary income on receipt?
▶ 0:59:45Ms. Kramer: On unrestricted stock? It is in, upon receipt.
▶ 0:59:52Sen. Wyden: How would this work if miners and staker's received unrestricted digital assets for validation services.
▶ 1:00:04Ms. Kramer: If they do not have to pay tax upon receipt the way you would if you got unrestricted stock than what happens is you don't have to pay tax until you sell it. And you could donate it, you could bequeath it to your heirs, there are all sorts of ways that you would not be taxed on it if it was not taxed officially.
▶ 1:00:31Sen. Wyden: Thank you Mr. chairman.
▶ 1:00:34Chair Crapo: Thank you very much. Senator -- [laughter]
▶ 1:00:54Sen. Johnson: Looking at the written testimony it also strikes me as this is an issue that should be completely nonpartisan. The factor what will be some controversies on the details of the minimum. I literally have a couple of hours worth of questions and would love to assemble a group like this and a broader group to go through. First of all, as we approach this I would like to like the medical profession, do no harm.
▶ 1:01:23Sen. Johnson: Is there a particular thing that would do harm that you've been hearing, I don't want to spend a whole lot of time but is there something we really ought to avoid?
▶ 1:01:33Chair Crapo: I was a the current -- Mr. somensatto: I was of the current tax treatment is doing harm.
▶ 1:01:44Sen. Johnson: I'm saying if we would write something that would do harm. Basically all of you are in agreement we've got to provide legislation to define these things, to provide clarity. I think the opportunity here is what are those things that need to be defined. I know you've got very specific suggestions here, I would want to find what does everybody agree on.
▶ 1:02:13Sen. Johnson: Isolate that, get those definitions in legislation. Then start haggling over the disagreements. What would we do that we do that would really create harm?
▶ 1:02:23Ms. Kramer: That is a great question. I would say that one of the things you could do to avoid harm would be to make the clarification that to have a harm would be to unintentionally provide tax subsidies for some people when other people do not get it.
▶ 1:02:54Ms. Kramer: That is really the harm question. So the job you have is to work on making sure that if you are doing it you are doing it you're doing it intentionally.
▶ 1:03:04Sen. Johnson: Mr. zlatkin you provided 10 recommendations. We were able to see each other's testimony before you came here today?
▶ 1:03:11Ms. Kramer: No.
▶ 1:03:13Sen. Johnson: I would suggest you read it. The question I would like to ask for the record is out of all the testimony what do you all agree on and where's the disagreement but do you have anything in particular you think would do harm if we were to put something in legislation.
▶ 1:03:31Mr. Zlatkin: I think my theme is that there is a lot of potential for overreporting. We spent a lot of time and that in this discussion about minimum and with stable coins itself. This is a democratized form of financial asset class. People can use things in ways that were not done before. And there is a tremendous potential for overreporting and burdening the system. Burdening it for the taxpayers and the irs.
▶ 1:03:58Mr. Zlatkin: So let's take reporting today and if you enhance this by not including at a minimum rule you'll have billions of transactions the taxpayers will have to report and keep track of. I don't think most taxpayers are prepared for that result.
▶ 1:04:13Sen. Johnson: When you talk about reporting, I want to always keep things as simple as possible. The block chain is based on pretty complex computers which we have now so hopefully would be able to use something like that.
▶ 1:04:32Sen. Johnson: Representing the aicpa I would ask you the same question in terms of his or something we do to create harm, we need all of the stakeholders as what are the areas of agreement, how do you properly define it. So I would also ask you whose network, what stakeholders aren't here. Is there something we could do that would actually do harm.
▶ 1:04:59Ms. Nellen: The only thing I could think of is if there was some term added but was not clear enough so we did not cause people to not act or interpret it indirectly so making sure terms are well defined with the types of transactions going on today. So far as stakeholders, the folks involved, range all over the board.
▶ 1:05:23Ms. Nellen: They could be individuals of small investments that are doing all kinds of things, have no idea about record-keeping or tax consequences. You have more income engaged in these transactions preview of large companies engaged in various transactions and perhaps what rule works for one might not be appropriate for another one.
▶ 1:05:46Ms. Nellen: I think today there is a lot of confusion among a lot of individuals whom everywhere from I thought I didn't have to pay tax until I cashed out at some point to I don't know how to keep records and that does not excuse them not paying their taxes. Some kind of workable guidance, I think enacting legislation is a wake-up call to the folks.
▶ 1:06:16Ms. Nellen: What you're doing has tax consequences so you have to figure them out and deal with them.
▶ 1:06:19Sen. Johnson: I appreciate you holding this hearing Mr. chairman. I hope we can form -- move forward in a thoughtful way. Let's not do any harm. We have to get this right. I hope people contact the committee. I've certainly offer to contact my office. Contact us, let's try and work through these issues and let's be very thoughtful.
▶ 1:06:45Sen. Johnson: I don't think there is any partisanship and there may be some complex issues to work through with differing opinions but I think this is a perfect opportunity to do something really important in a nonpartisan way. I applaud the committee for doing this.
▶ 1:07:02Chair Crapo: Senator daines.
▶ 1:07:05Sen. Daines: Our country is played such an important role in digital asked industry. However the uncertainty in our digital asset industry now faces risks chilling innovation at home and displacing U.S. leadership in cryptocurrency abroad.
▶ 1:07:33Sen. Daines: This is a global race and whoever goes the fastest is going to win. Without clear rules of the road, of these taxpayers and innovators face ambiguity and are forced to rely on general tax principles and really guessing as well as looking at guidance. If we don't get our tax code right we will lose our lead in this space. We will push jobs and money overseas and stall growth in this important industry.
▶ 1:08:05Sen. Daines: When I fought for permanency in the one big beautiful bill, american leadership was one of the main motivators, removing the uncertainty in washington dc. We won that battle a few months ago and I will ensure we win on this battle as well.
▶ 1:08:24Sen. Daines: More than 50 million americans are invested in cryptocurrency and as this number grows, more important it becomes to deliver certainty and stability to the american people. Given the progress my colleagues and this congress have made this year with passage of the g.e.n.I.U.S.
▶ 1:08:42Sen. Daines: Act and the ongoing development of digital asset market structure legislation, this committee is going to do our part to address the tax side of the measure. That is why I have started working on a framework that will provide much-needed clarity to protect american jobs, revenue and competition. Mr. zlatkin, what are the risks to U.S.
▶ 1:09:11Sen. Daines: Leadership in the digital assets space if we don't provide tax clarity?
▶ 1:09:16Mr. Zlatkin: Thank you senator. There are a number of rules or lack of clarity that shifts investment outside the united states. One is we do not have clear rules on sourcing. It's determined as to whether withholding tax applies to investors. Investors outside the united states don't know whether to source rules for staking or digital asset or domestic.
▶ 1:09:43Mr. Zlatkin: I think we should implement a rule we recommended which is good to be sourced according to that and you are not subject to tax. If you have a choice you will invest outside the united states.
▶ 1:09:58Sen. Daines: Where is that going?
▶ 1:10:00Mr. Zlatkin: It goes to validator's for staking validator is outside the U.S., going to counterparties that are not american. Another example is asset management. We have the strongest asset management framework. New york is legendary for that. We have rules and encourage foreign investment into united states. My colleagues made a reference to that as well. We do not have a clear rule on the treatment.
▶ 1:10:30Mr. Zlatkin: Securities and commodities are eligible for this exemption so using U.S. asset manager but that's not true for digital assets so I would strongly encourage this committee to consider legislation that would expand digital assets so it's clear that asset trading lending through an asset manager is similar to other asset classes.
▶ 1:10:50Sen. Daines: The sec recently issued guidance allowing for exchange traded products to stake the crypto they hold, this follows other regulatory efforts this year by the sec to increase access to crypto for everyday investors and cryptocurrency etp's. These regulatory developments will lead to more american taxpayers investments which I command.
▶ 1:11:18Sen. Daines: As popularity around crypto etp products grows so too does the imperative of providing clarity, certainty to U.S. taxpayers by ensuring tax code accommodates this unique and innovative feature offered by crypto focus products. Staking is a feature that underlies the value proposition for investing improves crypto and is important for investors.
▶ 1:11:45Sen. Daines: However the current rules and limitations for grants or trust do not contemplate novel concepts such as the staking of digital assets leaving many taxpayers relying solely on advice from accountants on whether these tax structures are viable investments in the fierce dutch in the first place.
▶ 1:12:06Sen. Daines: Given your expertise in digital assets can you explain why it's important that any comprehensive crypto tax package that will cement U.S. leadership and innovation in digital assets provides certainty and clarity around the use of structures like grants or trust for crypto etp's. >> Mr. zlatkin: Mr. zlatkin: totally endorse clarifying that. This should be a relatively simple fix.
▶ 1:12:30Sen. Daines: Simple is not necessarily in washington. >> in the sense it was designed to basically not apply tax with a look through treatment. Staking itself presents unique aspects of validation that are automated but most people think our robotic and effectively easy to accomplish.
▶ 1:12:57Sen. Daines: If grants or trust are not allowed to stay, etf's and etp's will not have a search for investors they can stake through. They will be shipped elsewhere outside the united states. Were similar types of arrangements are made available. I think it is relatively clear that staking itself that a trust should be inclusive.
▶ 1:13:20Sen. Daines: There are a lot more questions but thank you.
▶ 1:13:23Chair Crapo: Senator hassan.
▶ 1:13:26Sen. Hassan: Thank you to our witnesses for joining us today. Before I get into my questions I want to take a moment to address the federal government shutdown. While the topic of today's hearing is certainly important and I have questions for you, congress should be focused right now on working together to find a bipartisan way to reopen the federal government restored critical services for people, prevent health insurance premiums and keep millions of people from losing their
▶ 1:13:56Sen. Hassan: Coverage and the care that goes with it. While I look forward to hearing from our witnesses I once again urge my colleagues to come together on a bipartisan basis for the american people. Now to my questions. Miss nellen, I voted for this in order to provide clear rules for the stable coin industry the promotes innovation and addresses national security issues. Looking ahead to other issues, we need to continue to balance supporting the innovative U.S.
▶ 1:14:27Sen. Hassan: Industry while putting in place strong national security protections. For example, cryptocurrency raises important questions for our tax system. Activities don't always fit neatly into existing law. This creates real uncertainty for taxpayers who are trying to follow the rules under the irs as it works to investigate criminal activity.
▶ 1:14:51Sen. Hassan: Given the technical -- how can congress and the irs establish tax rules to provide clarity to the industry and to bolster the ability of law enforcement to go after criminals for illicit activities. >> thank you for the question, senator. There are two parts.
▶ 1:15:16Sen. Hassan: The compliance aspect -- the irs has provided auto guidance just by saying that under the tax law it is property. There are unique things that happen with digital assets that are not fitting into existing guides there. I think the recent guidance where they clarified how we treat amount realized, treat basis, that is added clarity.
▶ 1:15:50Sen. Hassan: Calculating gains and losses on most transactions, the rules are fairly clear. We get into other issues where you are trying to figure out the market rule, securities or commodities. Some people think all these things are securities. That is not true. It makes it quite a burden to figure out, with inconsistency on that. Another one where it would be very helpful -- there are companies donating bitcoin.
▶ 1:16:21Sen. Hassan: Bitcoin has gone up in value and people think, I will donate it. But the basis is puzzling, and some people overlook that. The donation deduction is really unfortunate, to change the rule.
▶ 1:16:37Sen. Hassan: It was very clear from congress doing it that just like public traded securities are a readily valued asset, crypto that is listed on an exchange -- you cannot donate those items without getting a qualified appraisal. There are a lot of rules on what makes something a qualified appraisal.
▶ 1:17:03Sen. Hassan: That gets to my second question. In addition, I want you to answer, Ms. kramer. I was going to ask how the federal filing requirements hold back the U.S. digital assets agency and nonprofits, releasing that cryptocurrency. Do you have more to add?
▶ 1:17:26Ms. Kramer: I would just underline what you said, which is that it is a rule that does not need to be in place with respect to publicly traded products, and to treat publicly traded cryptocurrency as a unique piece of artwork is incorrect and unnecessary.
▶ 1:17:53Sen. Hassan: One final question about reporting requirements, one of the controls we have to track and prevent money laundering, to also make sure we prevent sanctions evasion and other criminal activity. For decades, we required businesses to report when they received more than $10,000 in cash. As digital asset to become more widely used, it presents new challenges for law enforcement and tax administration.
▶ 1:18:23Sen. Hassan: That is why in 2021i supported the clean digital provisions act, requiring businesses that receive more than 10 thousand dollars in digital assets to report those transactions to the irs. I am going slightly over time. Can you briefly help us understand from your perspective, is it important that businesses report large digital asset transactions the same way large cash transactions are reported?
▶ 1:18:52Sen. Hassan: Should congress take steps to clarify that we need the same information on digital asset transactions?
▶ 1:18:57Ms. Kramer: The legislation in 2021 already added digital assets. If you had more than $10,000 in cash and one or more related transactions, you added the digital assets. The law is they are.
▶ 1:19:18Ms. Kramer: The form actually is electronically filed that I believe is under stinson -- finsen, on that website, to file those.
▶ 1:19:30Sen. Hassan: There has been some confusion there. Thank you.
▶ 1:19:34Chair Crapo: Thank you. Senator warren.
▶ 1:19:40Sen. Warren: I will start by acknowledging how absurd it is that the senate is convening to discuss anything other than this republican shutdown and stopping donald trump from throwing 15 million people off their health care, and more than doubling health insurance premiums for americans. This hearing is supposedly about clarifying crypto's tax.
▶ 1:20:06Sen. Warren: The context is that crypto holders are not paying at least $50 billion per year in taxes that they owe. In theory, reform proposals could plug those crypto tax loopholes, which would be a good thing. But the proposals I am seeing follow a familiar manuscript.
▶ 1:20:27Sen. Warren: Industry lobbyists want special tax rules for crypto that will make crypto billionaires richer and give crypto an unfair advantage over other kinds of competing financial products. I want to run through a few of those. Ms. kramer, you are an expert on tax law, so I have some very simple questions for you. Let's talk about a proposal that would allow crypto investors to avoid reporting income from crypto transactions under $300.
▶ 1:21:01Sen. Warren: If someone bought $300 worth of gold or 300 dollars worth of apple stock, would they be required to report any income they made from those transactions?
▶ 1:21:15Ms. Kramer: Yes, they would.
▶ 1:21:20Sen. Warren: If crypto investors got a de minimis exemption, would they pay less in taxes than traditional stockholders for the same types of transactions?
▶ 1:21:28Ms. Kramer: They would pay less.
▶ 1:21:33Sen. Warren: The joint committee on taxation estimates that this proposal alone would be a $5.8 billion tax boost for the crypto investors. Let's do a second one. An accountant who runs his own business that is paid for updating books and records -- just standard stuff. In crypto world, miners and stakers get paid for updating the blockchain, the crypto financial ledger.
▶ 1:22:02Sen. Warren: The accountant pays taxes on their income when they receive it. But one crypto industry proposal would allow miners and stakers to avoid paying taxes on the crypto they are earned as income until they sell it, which could be many years later, if ever. If this provision passed, would they effectively pay less than taxes then accountants, even when they are doing almost exactly the same work?
▶ 1:22:33Ms. Kramer: They would pay less.
▶ 1:22:38Sen. Warren: That is right. And the estimate here is it would be to the tune of about $4.3 billion, according to the jct. Let's do the last one. Professor nellen, you teach tax law.
▶ 1:22:58Sen. Warren: If a business receives cash, they have to submit additional reporting to the irs and to finsen, so the government can spot money laundering and criminal tax evasion. You were talking about that earlier with senator hassan. One proposal from crypto lobbyists would exempt crypto transactions from that requirement.
▶ 1:23:26Sen. Warren: With that proposal make it more or less difficult for law enforcement to counter crypto money laundering and tax evasion?
▶ 1:23:33Ms. Nellen: Given the focus of that provision -- it is already part of the laws. November 2021, we are waiting for regulations to make that more effective. That is the purpose of it, to help identify where there is a particular use of that. Some differences between cash and crypto is that on a cash transaction, the customer is most likely right in front of you.
▶ 1:23:59Sen. Warren: I understand that crypto has put out its reasons why it once the exception. All I am trying to get out each time is crypto lobbyists are crawling all over capitol hill. What are they looking for? They are looking for special rules for crypto. And not special rules that sometimes make it more expensive to operate crypto and sometimes make it less expensive.
▶ 1:24:24Sen. Warren: They want special rules -- not that make it easier to track crypto transactions and sometimes makes it more difficult -- every one of the special rules tilt in the same direction. That is for anyone invested in crypto to pay less than the equivalent elsewhere in the financial system.
▶ 1:24:46Sen. Warren: And in this case to make it harder to track what is happening in crypto transactions if they are being used for illegal purposes. I am all for getting rules that are appropriately tailored. But I think we should abide by the same principle we have used for decades in congress. And that is same basic transaction, same kind of risks means we need the same kind of rules.
▶ 1:25:17Sen. Warren: That should be true for crypto just like any other financial product. Thank you, Mr. chairman. >> it is very important -- I know a number of our colleagues have brought of the government shutdown. We have had an opportunity recently. We will continue to have opportunities to vote on a clean continuing resolution and immediately open the government up again. Let's keep that in mind.
▶ 1:25:48Sen. Warren: This is a great hearing, an important hearing. This hearing on the taxation of digital assets comes at a critical time. Around the world, countries are grappling with how to regulate cryptocurrency and blockchain technology. These hold promise for innovation and financial tools, but they also raise concerns which have been articulated today by many of my colleagues about transparency, compliance, and national security.
▶ 1:26:18Sen. Warren: The irs has highlighted some of these challenges. Many worried that it is premature, difficult to administer, and inconsistent with long-standing tax principles. Taxpayers want to comply but they need rules that are clear, practical, and fair.
▶ 1:26:40Sen. Warren: The president's digital asset working group report suggests that staking rewards should be taxed on when there is a realization of that -- that is, when those assets are sold and exchanged, not at the moment they are created. Mr.
▶ 1:26:59Sen. Warren: Somensatto, if the current ruling is inconsistent with these principles, should the irs consider rescinding it and replacing it to defer taxation until dix -- disposition, just like with other types of property, until congress weighs in?
▶ 1:27:15Mr. Somensatto: Yes, we have thought that in kueng center for several years. >> Mr. zlatkin: >> Mr. zlatkin, how does leaving the revenue ruling in place affect the U.S. ability to attract innovation and capital in this space?
▶ 1:27:34Mr. Zlatkin: This is one of those examples where I think Ms. warren is incorrect. I think people who self create property -- whether the text should occur upon receipt or as with other forms of interest -- it should be when you dispose of it and monetize in the form of caste. -- cash. There is an argument to be made, certainly.
▶ 1:28:06Mr. Zlatkin: It should be taxed when you monetize the investment, not when you create the property. I think we are seeing this is important to attract more investment into the united states. We discourage that when they stake through in the united states. . From a text -- >> from a tax practitioner perspective, what should the consequences be?
▶ 1:28:36Mr. Zlatkin: If the irs to rescind a revenue ruling until congress considers a more comprehensive framework --
▶ 1:28:43Ms. Kramer: Well, it would be different from what the interpretation of dominion and control is. The differences, the issue is, is it self-created property or is it income that you have earned for performing a service?
▶ 1:29:11Ms. Kramer: That is really what the issue is here. To self create the property is very often something you do with livestock or whatever. And the issue is, is the creation of adding the block or getting the reward going to be treated as a service, providing a service? That is really what the issue is.
▶ 1:29:42Ms. Kramer: >> thank you. My time will soon expire here, but I know that this hearing is intended in part for us to begin to find a path forward that will help us integrate digital assets into our tax code in a way that provides certainty while encouraging innovation.
▶ 1:30:03Ms. Kramer: While digital assets are evolving quickly, and congress risks being a step behind, from your perspective, what principles would you emphasize should guide us if we want to design tax rules that remain relevant as technology continues to advance?
▶ 1:30:21Mr. Zlatkin: One is kind of putting the individual user first. These networks are democratizing forces for transferring value between people. A lot of the language we use even up here is about corporations and how it impacts their tax accountant. I think that is important. Another principle that is important is distinguishing how this technology works.
▶ 1:30:47Mr. Zlatkin: For example, going back to the question of staking and mining, we have talked about stock issuance, but these assets are not something that is being paid by some third party. It is a computer program generating these assets. In understanding the foundation of how the technology works is really important. >> thank you. That last bit will keep me thinking.
▶ 1:31:16Chair Crapo: Thank you. Senator cassidy.
▶ 1:31:24Sen. Cassidy: I have been struck that people's medical data is commonly used by people who make trillions of dollars, but their data does not contribute anything to their own financial welfare.
▶ 1:31:46Sen. Cassidy: There is that indirect benefit of medical advance, but there is nothing like -- my gosh, I had the one gene that was a cure for alzheimer's, and somebody is going to do really well on it, and I get zilch. We have seen this in the past.
▶ 1:32:07Sen. Cassidy: But I think if you incentivize americans, it would share the wealth if you could have a distributed ledger in which the monetary value of my contribution would accrue to me with financial advantage. Does that make sense, or am I speaking to high fluting -- falutin'? How do you do that practically?
▶ 1:32:34Sen. Cassidy: How do you do it so if senator crapo's lab tests and clinical data were used on 23 and me, which has been monetized, but not accruing to the person contributing the genetic material -- how do we set up the system where it would accrue to my advantage as well? Not entirely, but somewhat?
▶ 1:32:56Mr. Zlatkin: As an initial matter, I would say it is an incredibly complex problem.
▶ 1:33:03Sen. Cassidy: If I want to track who is using the data and when it is used, there would be some system, that might be 10% of all shares of a certain product.
▶ 1:33:19Mr. Zlatkin: One topic that comes to mind is you are putting people's health check -- health data on a blockchain, which is publicly available information.
▶ 1:33:31Sen. Cassidy: The data would be held in a repository that would have restricted access. But you add something to the wallet of the person.
▶ 1:33:40Mr. Zlatkin: These are the exact questions that I think some of the developers who are working on ideas like this are wrestling with -- how you trust the repository that is issuing these tokens and transacting this. There are a lot of technologies that would come into play. We recently had a paper about dealing with digital identity on the blockchain and how this can work from a technical perspective, but also some policy changes.
▶ 1:34:11Sen. Cassidy: Does this need enabling legislation?
▶ 1:34:13Mr. Zlatkin: I would have to get back to on that one. I think digital identity is more of a proxy for what you are thinking. That is where we think there needs to be some policy movement to help create the environment. I would think it is probably similar.
▶ 1:34:36Mr. Zlatkin: You should come and work with us in kueng base on new technologies. I would say this. I think your comment is based on the promise of centralized ledgers. We share that promise here at kueng base. And I think we can use that in the tax system as well. We have a tax system that is based on paper, on facts machines.
▶ 1:35:02Mr. Zlatkin: We could collect and validate and ensure a true smart wallets, and use blockchain for a much more efficient tax system. With some of the things you just described, we should be innovative.
▶ 1:35:18Ms. Nellen: You are describing something similar to anna as cap royalty were every time a station plays a song, they have to pay a royalty, with blockchain tracking that. But you have to protect the person's private information.
▶ 1:35:37Sen. Cassidy: What I am a little bit concerned about is that you are suggesting that this might be the promise, but it would be difficult to realize at this time. Would it really be? Is it just a question of working to where we could democratize the financial benefits of medical advances to the people who are contributing? You could say I don't know, I have to think about it.
▶ 1:36:09Sen. Cassidy: But it seems like you have a bunch of smart people. It seems you do it for one person and then you scale it.
▶ 1:36:16Ms. Nellen: I think a lot of people are not thinking about the value of their information. We give information away all the time that perhaps has value to it.
▶ 1:36:29Mr. Zlatkin: You could allow people to try to monetize things that you just described.
▶ 1:36:40Sen. Cassidy: My step is available 24/7. If you have thoughts on how to do this, I would appreciate this, because I think this would actually -- they say in our society currently you can make a killing but you cannot make a living. People need to enjoy the benefits of the data they are contributing.
▶ 1:37:02Sen. Smith: Thank you. I would like to follow up on a lot of questions that senator warren was working on. I will come to you, Ms. kramer. As senator warren noted, miners and stakeholders get paid for updating the blockchain. This involves validating transactions to ensure that a coin cannot be spent twice at the same time.
▶ 1:37:27Sen. Smith: It seems to me that it is reasonable to say that miners and stickers are performing an essential service, and without them, the blockchain could lose integrity. They are performing an essential service. Our tech system generally provides a tax when someone provides a valuable service in return for compensation, regardless of how they are paid. They pay taxes on that compensation. Am I correct about that?
▶ 1:37:57Ms. Kramer: Yes, you are, and the hotspot issue is whether the stickers and the minors -- stakers and miners are performing a service, following the protocol from the platform, the blockchain plant form. So they are following instructions, basically, in order to perform a service.
▶ 1:38:24Sen. Smith: That is the way it seems to me. They are performing a service. You get compensated for performing a service. Regardless of whether that is in a dollar or a bitcoin, they pay taxes just like you. That is how you get paid for the service that you provide. In fairness, I think it is important as we are talking about this -- I understand that the crypto industry is not asking for tax exemption.
▶ 1:38:51Sen. Smith: But as senator warren was pointing out, there is a delay in when you pay your taxes under this potential scenario. And there is a benefit to deferral of your taxes. Could you talk about that and what that looks like?
▶ 1:39:04Ms. Kramer: You have an advantage because you are basically getting a tax subsidy.
▶ 1:39:12Sen. Smith: You delay and you get a benefit as a result of that delay. That is the way I see it. I want to get at this. I think there is a bit of a misconception about this idea that anybody can mine or stake cryptocurrency. A few years ago, there was this image of a kid in a basement with a computer doing mining. In reality, both mining and staking require often big chunks of capital. Am I right about that?
▶ 1:39:43Ms. Kramer: That is true, although small participants are able to participate through partnerships or joint ventures, or through coin base.
▶ 1:39:56Sen. Smith: And pooling or coming together in order to participate. But it seems to me that this -- it seems to me that if you are allowing for a deferral of paying taxes, that is a way of actually benefiting the big guys just as much as it is benefiting, and probably more, than the little person who is trying to get going here. I mean, is that how you see this?
▶ 1:40:28Sen. Smith: I mean, most of the benefit here is going to the big guys.
▶ 1:40:31Ms. Kramer: The benefit is going to be going where the capitalists. It is going to be the big guys.
▶ 1:40:39Sen. Smith: Exactly. Ms. nellen, I know folks have been talking about this on the committee today. The tax compliance act, taxpayers with at least $50,000 in certain foreign financial assets need to report them on their tax return, right? But there are some questions about whether these requirements would extend to digital assets.
▶ 1:41:08Sen. Smith: If americans do not report on their foreign assets, it makes it easier for them to avoid paying taxes. My question is this. If it is relatively easy for U.S. investors to get around geographic restrictions and to trade on foreign crypto exchanges or transact with foreign crypto wallets, if you take that into consideration, how should we be thinking about these reporting requirements to eliminate that perverse incentive?
▶ 1:41:37Ms. Nellen: I think it ties to clarifying the guidance of what is considered a foreign asset, to be explicit. When would you digital at, which is just out there in the ether -- when would it be considered a foreign asset because it is being acquired from a foreign exchange? I think more clarification on that.
▶ 1:42:04Ms. Nellen: I'm guessing some of that is being reported by practitioners and taxpayers, but needs more clarity from the irs.
▶ 1:42:13Sen. Smith: Less clarity is more opportunity to avoid?
▶ 1:42:15Ms. Nellen: Or just over looking at it. People might not be aware. They might not be asking questions because of the complexity of how you report these assets.
▶ 1:42:30Sen. Whitehouse: I'm going to make an off-topic comment and then am on-topic comment. The elephant in the city today is that a republican colleagues and the president shut down the government last night.
▶ 1:42:50Sen. Whitehouse: They have done so for a really extraordinary reason, which is to take away americans' affordable care health benefits. The affordable care act health benefits do not just land in democratic states. They landed in republican states.
▶ 1:43:19Sen. Whitehouse: Real live voting republicans want the affordable care act benefits to be extended. So all we are asking is that republicans do something they should be doing anyway because it is the right thing to do, and because it would benefit their own constituents, and their own constituents actually wanted. That should not be a hell of an ask.
▶ 1:43:46Sen. Whitehouse: But it is apparently so awful to republicans that they will shut down the government instead of sitting down and talking with us about solving that problem. This is a very significant cost problem for my state. This is the first hearing we have had since republicans put us in a shutdown. I can't not discuss that elephant in the room.
▶ 1:44:13Sen. Whitehouse: We are not shutting down and cutting health care benefits. Republicans are shutting down to cut health care benefits. All they have to do is agree that maybe a little bipartisanship would solve real problems for real constituents. It should be the order of the day. The other cost issue I want to raise -- the israel activities.
▶ 1:44:43Sen. Whitehouse: I know there are folks from the crypto, ai, and data center world listening. The cost problem of electric bills -- you could solve a lot of the problems that ai and crypto and big data centers are causing if this industry, which is going to make billions and billions of dollars -- ice sound like carl sagan there -- billions and billions of dollars -- would do a responsible thing and bring its own clean energy
▶ 1:45:14Sen. Whitehouse: To the grid. That ought not to be asking too much. The choice not to do that and to simply dump this added demand on to the grid, has a very predictable effect. When you and all that demand to a fixed supply, what happens? Prices go up. That is supply and demand. The elementary theory of market economics.
▶ 1:45:45Sen. Whitehouse: All of these new facilities are going to be driving electric utility bills up for regular customers. And I hope the industry will think about -- I get that you have this huge runway with the trump administration and can go rating and pirating through the world right now. But you only get one chance to make a first impression.
▶ 1:46:14Sen. Whitehouse: If your first impression to the world is we are not going to take care of our own energy supply -- we are going to drop into your grid and make all your electric rates go up by a ton because we are not willing to be responsible -- you are going to have to live with that through the rest of this industry's life. And then it is not just added demand for fixed supply.
▶ 1:46:39Sen. Whitehouse: This administration is trying to damage electric supply by taking out the clean energy sources that provide 95% of the new additions to the grid last year. For an industry that needs more electrons to sit quietly on its hands while an administration that it virtually controls on everything having to do with crypto and ai destroys the clean
▶ 1:47:12Sen. Whitehouse: Energy sources that can provide those electrons -- that makes no sense. But it makes the supply and demand price increase to regular americans way way worse. You are not just adding huge demand onto the grid. You are also pinching off the real supply that is out there.
▶ 1:47:36Sen. Whitehouse: The last point I will make, if you forgive me for one more minute, is that we are verging on having very serious climate related economic catastrophes. Look no further than the florida home insurance market. Look no further than the warnings about what happens when insurance markets collapse. You have a 2000 eight style meltdown.
▶ 1:48:09Sen. Whitehouse: We are not taking the climate change seriously, but insurance agencies have to end the banks have to, and that is where this leads. If this industry has shown up and not been responsible about bringing its own clean energy to the grid, and has grown from -- has driven up electric prices and required more polluting units to be brought online to meet their demand, there is going to be a reckoning.
▶ 1:48:39Sen. Whitehouse: I urge whoever is listening who is making decisions on policy and plans for this industry -- think about what you are doing to regular consumers. Think about why you would want to not help the industry provide the electrons you need, and think about why you would want to drive us on the perilous claimant path we are on. That is what you are doing right now.
▶ 1:49:05Sen. Wyden: I want to associate myself with your important remarks as well. >> thank you, Mr. chairman. To our panel, of course you have no say at all over what senator whitehouse just said. I appreciate that you all are here to talk about digital assets and how we are going to examine the taxation of digital assets.
▶ 1:49:37Sen. Wyden: And I think that during the biden administration, what we saw was government weaponization against cryptocurrencies with things like operation choque .2 .0. We had regulators that did not understand cryptocurrencies, and they were unfavorable to them because they did not have any control over them.
▶ 1:50:04Sen. Wyden: So what I would like to hear from you all is what you think are the most important priorities to include in crypto tax law, so that we continue to lead in crypto investments and innovation. If you want to very briefly give me a statement and then submit in writing what that priority would be, that is fine with me.
▶ 1:50:34Sen. Wyden: We will start right here and go straight down.
▶ 1:50:37Mr. Somensatto: My written testimony lays out the three areas we are most focused on. I will briefly touch on one, which is addressing how staking and mining are taxed. The recognition of exactly how the technology works is a really important issue to democratizing these networks.
▶ 1:51:06Ms. Kramer: I would think one of the key priorities has not really been talked about yet, which is that we want to make the united states a magnet for investment. We have to be much clearer as to what our rules are, so people can understand whether they are subject to tax. That discourages investment when they don't know.
▶ 1:51:32Mr. Zlatkin: We had 10 points I spoke about in my remarks. I think what we are really focused on is just the road itself. I think we don't have that right now. >> I am trying to get there with you.
▶ 1:51:52Mr. Zlatkin: The source of the rules, parity with digital assets, that would encourage investment in the U.S.. Any time we invent something new or do something different, it creates more pressure on the system.
▶ 1:52:12Ms. Nellen: So far as the concept of a -- digital assets posted on an exchange, various places where they are brought to market, where rules are needed in the tax law -- quickly coming back to the staking activity. Who is doing it? Is it a small investor? Is it a big company?
▶ 1:52:43Ms. Nellen: I think many taxpayers look at you have to receive something. Is it on my record? They would probably report that. They might even want to do that. From that point, they will have a capital gain as opposed to ordinary income. Also, there are some differences in how it is categorized. Is it creating an asset? Is it receiving something? That has a bearing.
▶ 1:53:14Ms. Nellen: The basis for the investment activity -- it is not going to be deductible. >> and we want those here. We don't want them offshore. So yes, when you do work toward that. Mr.
▶ 1:53:29Ms. Nellen: Somensatto, nashville, in tennessee, is really a very friendly crypto state and a friendly crypto setting. There is a bit park in nashville.
▶ 1:53:52Ms. Nellen: And what we have seen is that many of our small businesses now will accept cryptocurrency as payment. The problem we are running into is should that cup of coffee be a taxable event. And the de minimis issue. I would like you to speak for a moment -- my time is expired, but speak for a moment about de minimis.
▶ 1:54:18Mr. Somensatto: It is important for individual users who want to engage in this technology -- in a situation where it is not complex, is the fact that you still need to track your spending in order to figure out if you are able to get the exemption.
▶ 1:54:37Mr. Somensatto: As you talk about, paying five dollars for coffee, or paying a fractional transaction fee -- we would have to do a deep analysis of whether you fall under the exemption. I think that exemption does benefit individual users.
▶ 1:54:58Chair Crapo: We have now concluded the first round. Senator wyden has another question he would like to ask.
▶ 1:55:08Sen. Wyden: Thank you, Mr. chairman. We have not gotten into the question of the tax cap associated with this topic. According to the irs, the tax gap is nearly $700 billion per year. And these provisions do not even include taxes on digital assets, because the irs does not have visibility into that.
▶ 1:55:33Sen. Wyden: You all were here when I mentioned chuck reddick's comments on the tax gap already. If the digital asked that rules are unclear, it seems to me that taxpayers are going to resolve the ambiguities in their favor if there is confusion. So let's just go down the row. I would be interested in your assessment of whether I am correct.
▶ 1:56:03Sen. Wyden: Would clarifying the rules raise revenue? I would like input from our experts on this subject, and get your thoughts on revenue, because I think this should be part of the debate. We lit things up earlier, and now we have to get down to the nuts and bolts.
▶ 1:56:22Mr. Somensatto: Thank you, senator. I definitely think that clarifying these areas we have talked about today will revenue raise. This is an incredibly complex topic. A lot of this, you are talking about individual users of these networks. You need guidance to figure out what your tax liability is, or they are kind of guessing. I don't have a good sense.
▶ 1:56:52Ms. Kramer: Starting with the estimate and the numbers, I have no clue as to what the gap might be, but nobody has a clue, merely because the data is not available. You don't really have tracking of the cryptocurrency numbers the way we do have tracking of all the other financial markets. That is something we could benefit from if there was more official tracking.
▶ 1:57:22Ms. Kramer: As to -- I forgot the last part.
▶ 1:57:24Sen. Wyden: I wanted to get your sense of whether I was thinking right in terms of taxpayers resolving ambiguities. Do you agree that if we clarified the rules --
▶ 1:57:44Ms. Kramer: Obviously, if you don't have a rule you have to follow, you are going to interpret it in your favor. That is just the way it is done.
▶ 1:57:54Mr. Zlatkin: Thank you, senator. I and -- I support what you said that gamesmanship is encouraged in the absence of rules. I think we need changes in how we clarify that, building the complaint tax system. We encourage our taxpayers to comply with the laws. We have a monitoring center to try to encourage people to do that. To have a framework that would report transactions.
▶ 1:58:26Mr. Zlatkin: I would encourage that each member in the senate consider when doing that -- this is an asset class that is so democratized that we are talking about billions of transactions. What I would encourage the senate to consider is administer ability for overreporting.
▶ 1:58:48Mr. Zlatkin: If you require taxpayers to report a quarter percent of a loss, I think we should be chasing bigger transactions. If you are requiring that all stable coin transactions be reported, you are going to be daily used with billions of zero value reporting, which does not encourage fairness or a system that actually works.
▶ 1:59:17Mr. Zlatkin: I think the irs is probably unprepared today to absorb the amount of information that coin base alone would provide. Let's create a fair system. Let's create rules for the road. We could encourage this industry to grow within the united states. Let's do that. When we create that system, let's also create and administer -- an administerable system.
▶ 1:59:49Ms. Nellen: I don't know what the tax gap could be, but there are things people could be doing. Certainly, clear rules and anything that can be done to help get more information out, and for the irs to explain how all these transactions work, where they have tax obligations -- you have a lot of information out, but a lot of it is not unique to crypto.
▶ 2:00:16Ms. Nellen: It is property in general, which might not always help answer the question. So getting more tax education out there would be good. And just getting legislation passed to draw attention to I need to understand better my tax considerations here. I think reminders to folks that if you had sale or exchange transactions, you have reporting obligations.
▶ 2:00:46Ms. Nellen: I think we can learn from existing areas. For example, a lot of people know that it is income even if you do not get a 1099 or a w-2, and that goes with more transactions that don't get reported, and there will be a lot of transactions that do not fall into current reporting for centralized exchanges. You need to keep your records and get those reported.
▶ 2:01:17Ms. Nellen: Insofar as people engaged -- bad actors are going to be bad actors with tax or digital -- with cash or digital assets. We need enforcement to help address some of that.
▶ 2:01:29Sen. Wyden: Thank you.
▶ 2:01:32Chair Crapo: That does wrap up the questioning. I want to thank our witnesses for not only appearing before us today, and for the information you were able to provide us in response to questions, but your written testimony. It is and will be extremely helpful to us, as evidence this morning. There is a strong bipartisan foundation on the taxation of digital assets.
▶ 2:01:58Chair Crapo: I look forward to continuing my work with colleagues on both sides of the aisle to ensure that our tax code has a free -- a clear framework for american leadership. With that in mind, I remind my colleagues that the deadline for submitting any questions for the record is 5:00 p.m. On wednesday, october 8. You should expect to get additional questions for the record, and we welcome your additional information. With that, this committee stands adjourned. Thank you again.