On Tuesday, April 30, 2024, U.S. Congressmen Drew Ferguson (R-GA) and Wiley Nickel (D-NC) introduced a bill, the Providing Tax Clarity for Digital Assets Act, to codify the U.S. federal income tax treatment of the acquisition by a taxpayer of a reward of a digital asset pursuant to a consensus mechanism (i.e., a staking reward). The proposal provides that digital asset staking rewards would be taxable upon disposition, rather than at the time of acquisition.
If passed, a new Section 92 would be added to the Internal Revenue Code of 1986, including the following:
- If, pursuant to a blockchain consensus mechanism with respect to any digital asset, a person acquires (directly, or indirectly through a service provider) a reward of a digital asset—
- no income or gain shall result at the time of such acquisition, and
- on the disposition of such digital asset in any taxable year, the income or gain (if any) with respect to such asset shall be the income or gain, as the case may be, from the disposition for such taxable year.
If enacted, the proposed rule could reduce or eliminate the mismatch in timing vis-à-vis the acquisition of the reward and the receipt by a taxpayer of cash with which to pay the tax on the reward.
The bill takes a position contrary to that taken by the Internal Revenue Service last summer in Rev. Rul. 2023-14. In that ruling, the IRS held that if a cash-method taxpayer stakes cryptocurrency native to a proof-of-stake blockchain and receives additional units of cryptocurrency as rewards when validation occurs, the fair market value of the validation rewards received is included in the taxpayer’s gross income in the taxable year in which the taxpayer gains dominion and control over the validation rewards.
It is important to note that both Rep. Ferguson and Rep. Nickel have announced they are retiring and will not be seeking reelection, leaving the future of this bill uncertain. If you have any questions about this proposal and how it might affect your business, please contact the author or any member of Foley’s Digital Assets, Web3 & NFTs team.
