The U.S. Senate Committee on Finance made a noteworthy move on July 11, 2023, when it issued an open letter inviting participation from the digital asset community and other stakeholders. The committee’s open letter seeks comprehensive feedback on how federal tax law should treat digital assets in an era of rapid technological change.
The letter, addressed to experts and interested parties, raises a series of pivotal questions. One of the key inquiries revolves around whether digital assets should be subject to “mark to market” treatment, a contentious issue due to the unique price volatility of digital currencies. Additionally, the committee seeks insights into the tax implications surrounding loans involving digital assets. These questions underscore the need for a flexible and responsive tax framework that can adapt to the dynamic nature of digital assets.
TaxDAO’s Digital Asset Tax Reform
Responding to this call for input, TaxDAO, an organization founded by experienced tax and finance professionals in the cryptocurrency sector, submitted a comprehensive response to the Committee on Finance on September 5th. TaxDAO emphasizes the necessity of amending the relevant sections of the Internal Revenue Code (IRC), specifically IRC 170, to explicitly include digital asset donations as tax-deductible contributions.
In their response, TaxDAO proposes that tax-deductible digital assets should be limited to widely recognized and publicly traded digital assets. They argue that assets like NFTs, which often lack a clear and universally accepted fair market value, should not be subjected to the IRC 170(f)(11) exception. This stance is based on concerns related to the potential manipulation of transaction values in the NFT market. Furthermore, TaxDAO suggests that accepting non-liquidatable assets like NFTs may impose additional financial burdens on recipients, defeating the purpose of donations.
Navigating Digital Taxation
TaxDAO recommends that donations of digital assets with a readily determinable fair market value, following guidelines similar to IRS Notice 2014–21 and related documents, should be considered for the IRC 170(f)(11) exception. This would encompass virtual currencies actively traded on platforms where real or virtual currencies are exchanged and have accessible price index or value data sources.
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Founded by a team of seasoned tax and finance executives within the cryptocurrency space, TaxDAO possesses international experience and insights into global tax compliance and asset allocation. Their contribution to shaping tax policies in the rapidly evolving digital asset landscape is expected to be instrumental as the U.S. Senate Committee on Finance navigates the complex terrain of digital asset taxation.