Digital Asset Taxation Update

Draft legislation addressing various aspects of digital asset taxation has been introduced by Republicans in the House and was the subject of a June 9, 2026, legislative hearing before the House Committee on Ways & Means.^[1] Testimony and discussion at the hearing, as well as recent court cases and enforcement activity related to cryptocurrency, suggest that development and refinement of these legislative proposals could have significant effects on the tax treatment and reporting of digital asset transactions.  We note, however, that these assorted proposals do not amount to a comprehensive plan for the taxation of digital assets and seem to go out of their way not to reach a conclusion as to whether digital assets are securities or commodities.  We also note that some aspects of these proposals are quite controversial and differ from the bipartisan draft Digital Asset Protection, Accountability, Regulation, Innovation, Taxation and Yields Act (the “PARITY Act”).[2]

We highlight below some of the key provisions in each piece of draft legislation.

Mark-To-Market Accounting; Trading Safe Harbor; Digital Asset Lending

The Providing Analogous Rules for Digital Assets Act (the “PAR Act”)^[3] would allow dealers and traders of certain “widely traded digital assets” to elect mark-to-market accounting, similar to traders and dealers of commodities and traders of securities. If such a digital asset is also a security or commodity, the digital asset would not be treated as a security or commodity for mark-to-market election purposes unless the digital asset is a security held by a securities dealer.

This proposal also would expand the trading safe harbors in section 864(b)(2) to include trading of “traded digital assets” effective for taxable years ending after December 31, 2025, and extend section 1058 nonrecognition treatment to “traded digital asset” lending transactions for transfers made after the date of enactment.

Source of Gain

The End Digital Assets Tax Shelters Act^[4] would amend section 865(g) to treat as U.S.-source any gain from the sale of digital assets, and from the sale of property received in exchange for digital assets, if the seller is a U.S. citizen or resident alien and (i) was a U.S. resident in any of the previous ten taxable years, and (ii) did not pay income tax of at least ten percent of the gain to a U.S. possession or foreign country.

For example, pursuant to this proposal, a bona fide resident of Puerto Rico who had resided in the United States within the past ten years would not be able to source gain on sales of digital assets to Puerto Rico if the Puerto Rico income tax paid on that gain was less than ten percent, even if the digital asset was acquired while a bona fide resident of Puerto Rico.  This represents a reversal of current law. 

The proposal would apply to taxable years beginning after December 31, 2026. 

Wash Sales; Constructive Sales

The Applying Existing Tax Anti-Abuse Rules to Digital Assets Act^[5] would extend the section 1091 wash sale rules to digital assets, and extend the section 1259 constructive sale rules to digital assets other than qualified U.S. dollar stablecoins.

This proposal would apply to dispositions and constructive sales after the date the proposal was introduced.

Charitable Contributions

The Charitable Deductions for Digital Asset Donations Act^[6] would amend section 170(f)(11)(A)(ii)(I) to allow taxpayers to rely on publicly available prices to value certain charitable donations of “widely traded digital assets,” rather than requiring an appraisal. A proposed amendment would value a donation based on the amount the organization receives from selling the donated digital assets.[7]

The proposal would apply to taxable years beginning after December 31, 2026.

Voluntary Disclosure

The Digital Assets Voluntary Disclosure Program Act^[8] would establish a voluntary disclosure program for certain taxpayers to remedy underreporting or misreporting of digital asset ownership or transactions, with reduced penalties.

Taxpayers might welcome the opportunity to make voluntary disclosure and avoid the harsh treatment meted out by the court in United States v. Ahlgren, ^[9] the first federal criminal prosecution for failing to report gain from sales of digital assets accurately. In that case, the taxpayer pleaded guilty and was sentenced to two years in prison and ordered to pay more than $1 million in restitution.

This proposal would be effective as of its date of enactment.

Mining and Staking

The Tax Clarity for Mining and Staking Act^[10] would provide an election to defer the recognition of income on digital assets that a taxpayer received as payments for validating blockchain transactions, known as mining and staking awards.^[11] Electing taxpayers would recognize gain only when these digital assets were sold or upon certain other dispositions of such assets (a proposed amendment would terminate deferral after five years). The election generally would not be available to controlled foreign corporations (CFCs), passive foreign investment corporations (PFICs), or foreign trusts. Once made, an election could only be revoked with the consent of the Service.  The recognized gain would be ordinary income.

This proposal is quite controversial, as many view mining and staking rewards as fees for services and others view such awards as self-created property. 

In a recent memorandum opinion[12] the Tax Court sided with the fee-for-service analysis and held that a taxpayer’s staking rewards were includible as gross income upon receipt. The Tax Court emphasized that the taxpayer could have sold his staking rewards or converted them to cash at any time, and concluded that the taxpayer’s staking rewards were taxable in the year he received them. The Tax Court also rejected the taxpayer’s assertions that mining and staking rewards are similar to pro rata stock dividends or self-created property, which generally are not taxed until disposition.  The Tax Court found that the taxpayer’s staking rewards “increased both the proportion and the value” of the taxpayer’s interest in the digital asset at issue, and that “stakers are not the ones who created” the staking rewards.

The proposal also would treat gain recognized on digital assets received for mining or staking for which an election was made as U.S. source if a taxpayer acquired the digital assets while a U.S. resident, and otherwise as non-U.S. source. If the taxpayer made an election to defer recognition, sourcing would be based on the taxpayer’s residence at the time of disposition of the digital asset. 

This proposal generally would apply to mining and staking awards received in taxable years beginning after the date of enactment.

Simplification

The Less Tax Paperwork for Digital Asset Owners Act^[13] would provide a “simplified accounting” election for gain or loss for digital assets that are “widely traded.” This election would be available to any taxpayer, and would be made separately for each “designated type of digital assets.” The election could be revoked only after five years. Gain or loss recognized under this proposal would be treated as short-term capital gain or loss. 

In addition, the proposal would exempt certain stablecoin transactions from gain or loss recognition, and from broker reporting. It would also provide that certain taxpayers would not recognize gain or loss when using digital assets to pay a transaction validation fee in a digital asset transaction, if the fee is $10 or less (termed a “de minimis digital asset network fee”). The proposal would allow digital asset traders, brokers, dealers, and validators to qualify for non-recognition if they are not subject to various mark-to-market rules or the “simplified accounting” rules described above, and if it would “not result in a substantial Federal revenue loss.”

This set of proposals generally would apply to asset dispositions after, or taxable years beginning after, December 31, 2027.

Conclusions

Taxation, regulation, and enforcement related to digital assets are evolving, as shown by the proposals discussed above, by other proposed legislation such as the CLARITY Act (H.R. 3633), and by recent enforcement activity^[14] targeting money laundering and fraud related to cryptocurrency.

We are watching developments in these areas carefully. For more information, please contact us.