Casey Wagner

<div id="highlights-block_62a8b418e6a12" class="highlights">
 <ul>
 <li>Lummis/Gillibrand bill clarifies that unrealized staking and mining gains should not be taxed as income</li>
 <li>The bill, if passed, would impact a tax law one Tennessee couple has been fighting for over a year</li>
 </ul>
 
</div>



The long-awaited US digital asset bill introduced earlier this month provides clarity that could change the outcome of one legal battle currently underway.&nbsp;



The <a href="https://www.gillibrand.senate.gov/imo/media/doc/Lummis-Gillibrand%20Responsible%20Financial%20Innovation%20Act%20%5bFinal%5d.pdf" target="_blank" rel="noreferrer noopener">Responsible Financial Innovation Act</a>, co-sponsored by Sens. Cynthia Lummis, R-Wyo., and Kirsten Gillibrand, D-N.Y., states that miners and stakers would only have to pay income taxes on realized rewards — when the associated digital assets are sold. 



Income generated by digital asset mining and staking “shall not be included in the gross income of the taxpayer” until the taxpayer sells or trades the assets, the bill says.



The clause would change a tax law one Nashville couple has been fighting for over a year.&nbsp;



In May 2021, Joshua and Jessica Jarrett requested a refund of $3,293 of income tax paid in 2019 for the receipt of 8,876 Tezos tokens, according to a legal <a href="https://www.scribd.com/document/509435727/Jarrett-Compl?secret_password=LFIAqtDNw9i5loKXdjB4" target="_blank" rel="noreferrer noopener">complaint</a> filed on May 26, 2021, with the US District Court for the Middle District of Tennessee. The couple also sought a $500 increase in tax credits for lost income. 



Tokens attained through proof-of-stake protocols are taxpayer-created property and should not be taxed until sold or exchanged, the Jarretts argued. The complaint claims that nothing under United States law, nor IRS code and regulations, allows taxpayer-created property to be taxed as income.&nbsp;



The IRS offered the Jarretts a refund in December. The couple refused, choosing instead to continue to fight the matter in court. In March, the <a href="https://cms.blockworks.co/doj-moves-to-dismiss-tezos-staking-tax-case-in-closely-watched-crypto-dispute/" target="_blank" rel="noreferrer noopener">Department of Justice</a> urged a judge to dismiss the case. A bench trial is currently set for March 2023.



As the law currently stands, stakers and miners are required to pay taxes on rewards as if they were income — the law does not consider if the tokens were sold or traded.



“This has been actually catastrophic for some clients that stake, for example, UST and via some of these very high-yield staking platforms,” Andrew Gordon, tax attorney and president of Gordon Law Group, said. “You are paying tax on those rewards at the fair market value as they&#8217;re coming in, not when you sell it, but as it comes in.”&nbsp;



This bill, if passed, Gordon said, would create a strong incentive to bring miners and stakers to the US.&nbsp;



The crypto bill now faces a lengthy vetting process, with it next moving into committee. Gillibrand serves on the agriculture committee, which has oversight of the Commodities Futures Trading Commission, and Lummis serves on the banking committee, which oversees the SEC.



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New Crypto Bill Suggests Unrealized Staking Gains Should Not Be Taxed

<div id="highlights-block_62a36f55c42f4" class="highlights">
 <ul>
 <li>Senators Lummis and Gillibrand’s bill attempts to bring DAOs into the tax code, but classification of groups will be complicated</li>
 <li>State versus federal classifications are also concerning, one industry member said</li>
 </ul>
 
</div>



The long-awaited bipartisan digital asset bill introduced to Congress Tuesday has many in the industry optimistic about the future of crypto policy, but sections of the legislation, if passed, may significantly change how actors in the space operate.&nbsp;



Sens. Cynthia Lummis, R-Wyo., and Kirsten Gillibrand, D-N.Y., co-sponsored the initiative, dubbed the <a href="https://www.gillibrand.senate.gov/imo/media/doc/Lummis-Gillibrand%20Responsible%20Financial%20Innovation%20Act%20%5bFinal%5d.pdf" target="_blank" rel="noreferrer noopener">Responsible Financial Innovation Act</a>. While the bill includes some measures mentioned in <a href="https://cms.blockworks.co/bipartisan-crypto-bill-to-hit-congress-within-weeks/" target="_blank" rel="noreferrer noopener">other proposed legislation</a>, it also tackles new issues for the first time, one of which being DAOs, or decentralized autonomous organizations. 



In the section on DAOs, the bill specifies that the default classification for these community-led entities is as a business entity for tax purposes. It also requires most DAOs to be properly incorporated in accordance with existing laws of an identifiable jurisdiction, such as a limited liability company (LLC) or partnership.



“That means that DAOs would be taxed as corporations or as partnerships, despite the differences between DAOs and traditional corporations and partnerships,” said Dario de Martino, a cryptocurrency and blockchain attorney at Allen &amp; Overy. “Under the existing default rules, a DAO would be a partnership if the DAO is domestic or if it is non-US, and at least one of its members does not have limited liability.”



Because DAOs are by definition decentralized and have several members, often with frequent turnover, classification and taxes are going to be complicated, de Martino added.



The bill states that to qualify as a DAO, an organization must be “properly incorporated or organized under the laws of a State or foreign jurisdiction as a decentralized autonomous organization, cooperative, foundation or any similar entity.”



“Looking forward, the definition of a DAO will be crucial — is it a corporation or a security?,” Aaron Tilton, CEO of SmartFi and former Utah state legislator, said. “DAOs allow voting rights for governance and some economic distribution rights similar to dividends.”



DAOs may require sub-classification for tax purposes depending on how they operate and how they remunerate their members, Tilton added.&nbsp;



“There will be much for both federal and state legislatures to tackle in the coming months and years on this issue,” he said.&nbsp;



The bill states that a project can avoid business disclosure requirements if it can prove it is sufficiently “decentralized” to not be considered a business entity.&nbsp;



“Termination of disclosure requirements is tied to whether a project has substantial evidence that there have been no entrepreneurial or managerial efforts with respect to the underlying assets,” de Martino said.&nbsp;



The proposed disclosure regime would remain in place until the issuer can demonstrate that the project is decentralized through an opt-out process, de Martino said. The issuer must submit a certification, which may be denied if the SEC determines by majority vote that the certification is not supported by substantial evidence.&nbsp;



State versus federal classification is also an issue, Tilton said. LLC and corporation filings are submitted to state entities, further complicating the potential implications of Lummis and Gillibrand’s bill, he said.&nbsp;



&#8220;The DAO recognition will really be handled at the state level like any other business entities such as corporations or LLC,” Tilton said. “Without state level recognition of DAOs, those federal tax implications will not be affected.”



Jae Yang, CEO of non-custodial crypto exchange Tacen, agreed, adding that enforcement will need to be further clarified.



“Who&#8217;s going to be watching these DAOs very closely remains to be seen,” Yang said. “Much like there are tens of thousands of companies that are out there, but not every single company&#8217;s internal activities are going to be reviewed by auditors or regulators from outside.”



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Start your day with top crypto insights from David Canellis and Katherine Ross. <a href="https://blockworks.co/newsletter/empire">Subscribe to the Empire newsletter</a>.



Explore the growing intersection between crypto, macroeconomics, policy and finance with Ben Strack, Casey Wagner and Felix Jauvin. <a href="https://blockworks.co/newsletter/onthemargin">Subscribe to the Forward Guidance newsletter</a>.



Get alpha directly in your inbox with the <a href="https://blockworks.co/newsletter/research">0xResearch newsletter</a> — market highlights, charts, degen trade ideas, governance updates, and more.



The Lightspeed newsletter is all things Solana, in your inbox, every day. <a href="https://blockworks.co/newsletter/lightspeed">Subscribe to daily Solana news</a> from Jack Kubinec and Jeff Albus.