The Crypto Industry is actively pushing legislation that seeks special treatment for itself and its products for the purposes of evading taxes. While tax laws and rules regarding crypto need clarification and stability for the purposes of ensuring they are paying their fair share in taxes, the proposals put forth so far, including by Rep. Max Miller (R-OH), would fail to meaningfully address these issues. Instead, Rep. Miller’s draft legislation and others like it would facilitate tax evasion schemes through crypto for billionaires and other nefarious actors.

Here are some of the common claims the industry is making, and how they don’t tell the full story of the implications of these proposed policies:

Special Tax Treatment for Income Earned Validating Transactions on a Blockchain (aka Taxing Mining or Staking Rewards): Taxation Only Upon Disposition

The Claim: All the crypto industry wants is the Treasury to “clarify” current rules to align with longstanding tax principles governing “self-created property.”

The Reality: Under current law, income earned for performing a service – like validating transactions on a blockchain – is subject to income tax when that income is received. When a miner or staker receives cryptocurrency, it is considered income at the fair market value on that day. The crypto industry’s proposal would allow them to avoid paying any tax until they sell the crypto, which could be years or decades later. This is a massive and unacceptable tax deferral loophole, essentially providing an interest-free loan from the government which allows wealth to grow tax-free in the interim. While the industry likes to analogize payment for validating transactions on a blockchain to the income farmers earn when they sell crops they have grown, the comparison is not apt. Crops are generally sold quickly after harvest, cost resources to store and tend to lose value the longer they are held. These incentives do not hold true for cryptocurrency.

The beneficiaries of such a tax change would be large-scale mining and staking operations, which are capital and energy-intensive. The industry portrays miners as small time entrepreneurs, but data shows that just three major companies that operate mining pools control a majority of crypto mining activity (for Bitcoin). They could accumulate vast amounts of crypto assets without any tax liability, using them as collateral for loans or simply holding them to avoid taxes indefinitely.

Special Tax Treatment for Income Earned in Crypto Transactions under $300, up to $5,000 Annually

The Claim: This exemption is analogous to the current exemption for foreign currency gains for small personal transactions, and would make digital currencies practical for everyday purchases  like buying coffee.

The Reality: No special tax exemption exists for the first $5000 of labor income earned in small transactions, nor does an exemption from tax rules exist for a de minimis amount of capital income from selling stock or another financial instrument. While the crypto industry claims compliance costs with current tax rules hinder the use of crypto for small transactions, the reality is that the proposed exemption would still require compliance tracking to ensure that taxpayers do not exceed the $5000 annual cap. Additionally, a generous de minimis threshold could be easily gamed. It’s easy to imagine a crypto investor setting up multiple wallets at little or no cost, then programming digital bots to automatically separate crypto transactions tied to investment activity into this array of wallets, each evading the threshold. If detected, the investor could quickly empty those wallets, create new ones, and begin again. 

Thus, this proposal would primarily benefit tax evaders and the wealthy while ensuring crypto is subsidized beyond all other existing asset classes.

It is also important to remember that cryptocurrencies are not money in the same way as foreign currency. Travelers need to use foreign currencies to purchase everyday items or services. This is not the case for crypto – right now, everyday items or services almost never require crypto as payment. The foreign currency exemption facilitates mandatory transactions while reducing compliance costs, while this proposal creates incentives for taxpayers to participate in optional crypto transactions in order to avoid taxes while still requiring burdensome tracking to ensure they do not exceed the annual gains cap.

Preventing Cross-Chain Bridging or Wrapping/Unwrapping from being Treated as “Phantom Income”

The Claim: The crypto industry argues that certain technical processes in the crypto world—like wrapping, unwrapping, and cross-chain bridging—are not true economic events and therefore should not be taxable. They compare these actions to exchanging a $20 bill for two $10 bills with no real economic value being gained or lost.

The Reality: This is a Trojan Horse to create permanent tax-deferral vehicles within the crypto ecosystem. Swapping Bitcoin for a Bitcoin-backed stablecoin or Ethereum is not the same as splitting a $20 bill – it is a meaningful change in economic position. Wealthy sophisticated traders could easily game the system by constantly moving money in and out of different crypto assets without ever triggering a tax event. This would act as an interest-free loan from the government and allow wealth to accumulate entirely tax-free.

Additionally, the tax code should not favor one type of asset or transaction over another without good reason. If you sell a share of General Motors stock and purchase Ford stock of equal value, it is a taxable event. Granting a special exemption for crypto transactions violates the principle of neutrality in tax policy and gives the digital asset industry an unfair advantage.

Create Special Charitable Giving Rules for Digital Assets

The Claim: Would encourage philanthropic giving by reducing appraisal costs.

The Reality: This is a potentially significant tax break for the wealthy. Under current law, donating certain types of appreciated property (like publicly-traded stock) to charity allows the donor to deduct the full fair market value and avoid paying capital gains tax without a qualified appraisal. This proposal would extend that privileged treatment to “actively traded” digital assets, which is left undefined in proposed legislative language. 

This is especially problematic for crypto that is infrequently traded or can be easily manipulated by a few holders. Depending on how “actively traded” is defined in regulations, a wealthy individual could buy crypto, manipulate its pricing (either by using accommodation parties or making smaller trades to set purported value), see it appreciate 1000%, donate it before it is properly re-valued by the market, and get a massive tax deduction for the inflated value without ever paying tax on the gain. 

Market manipulation on crypto platforms, including wash-trading activities, is rampant. A 2022 National Bureau of Economic Research report found that illegal wash trading may account for almost three-quarters (over 70 percent) of average crypto trading volumes on unregulated exchanges.  

The charitable deduction is a proven method for the wealthy to reduce their tax burden dramatically and is already a windfall for the ultra-rich with nearly half the tax benefit ($114 billion in 2023) going just to households with over $1 million in annual income. One family of billionaires exploited the charitable deduction to reduce their tax bill by $38 million by donating to their own estate. Making it easier for cryptocurrency gifts to exploit this type of abuse, without additional guardrails against pump-and-dump schemes,  would make the tax code even more inequitable.

Allowing Crypto to Qualify for R&D Tax Credits

The Claim: Research and development into crypto should be incentivized through the tax code.

The Reality: This is a misuse of a credit designed for experimental scientific research. The R&D credit is for activities like developing new pharmaceuticals or manufacturing processes. Arguing that writing code for a new meme-coin or NFT project constitutes qualified research stretches the credit beyond its intent. It would effectively allow crypto ventures to have their development costs subsidized by taxpayers, with no material benefit to taxpayers. Currently, the R&D tax credit is one of the largest and fastest growing tax expenditures, one far outpacing growth in the overall economy. Opening up this credit to crypto would only exacerbate this trend. Lastly, the venture capital firms that dominate crypto start-up investment capital already benefit from generous federal and state tax subsidies or treatment; expanding such subsidies further is unreasonable.

Change Reporting Requirements For Crypto

The Claim: The crypto industry is asking for a delayed implementation or full repeal of the IRC 6050I reporting rules because it places an unfair burden on the industry and stifles innovation. 

The Reality: This is a direct effort to kill a powerful anti-money laundering rule passed by Congress in 2021. IRC 6050I requires businesses to report certain cash transactions over $10,000–including digital assets– meaning businesses that receive large crypto transfers must report the sender’s information to the IRS. The crypto industry fiercely opposes this because it would make crypto less attractive for the many users that depend on crypto’s relative  anonymity for regulatory evasion. By demanding a delay until other, unrelated policies are clarified, the industry is trying to prevent this powerful anti-crime and anti-evasion tax tool from ever taking effect. This benefits anyone using crypto for illicit activities, from sanctions evaders to tax dodgers, as some studies have exposed.

CONTACT INFORMATION:
John Foti
Deputy Executive Director & Legislative Director
jfoti@americansfortaxfairness.org 

IMPORTANT SOURCES:

Letter to Oppose Stablecoin Bill Giveaway to Trump Crypto Kleptocracy
Coalition letter opposing CLARITY Act crypto legislation
The Crypto Industry’s $28 Billion in ‘Dirty Money’
Three Tax Changes the Crypto Industry Wants Congress to Address
Report Examines Whether Crypto Tax Rules Harm Taxpayers 
Devil Will Be in the Details of Senate Democrat Crypto Principles
Cryptocurrency Income Is Taxable Income
Lummis bill would provide new rules for digital assets
Factsheet: The GENIUS Act’s Flaws and Failures
Fact Sheet: The CLARITY Act: A Crypto Cash Grab that is a Consumer Catastrophe