Chairman Smith at Digital Asset Legislative Hearing: America Needs Clear Tax Rules to Remain Digital Asset Capital of the World

WASHINGTON, D.C. - Ways and Means Committee Chairman Jason Smith (MO-08) delivered the following opening statement at a Committee legislative hearing on digital asset taxation:

As prepared for delivery.

"Today marks the first legislative hearing in this Committee in years, which highlights the importance and complexity of digital asset taxation.

"The digital asset status quo is untenable. America needs clear tax rules of the road to remain the crypto capital of the world.

"Recent data indicate that a quarter of Americans, or over 67 million people, own cryptocurrency. That's a dramatic increase from only 3 percent at the start of this decade.

"Nearly a quarter of cryptocurrency holders earn less than $75,000, and the average crypto holder is nearly as likely to work in construction, manufacturing, or food service as tech or finance. Crypto owners live in every community - urban, rural, and everywhere in between.

"Today, cryptocurrency has a market capitalization of over $2 trillion. That's a massive industry by any measure, and nearly all other industries of a similar size enjoy clear tax policies.

"The days of debating whether digital assets are a passing fad are gone. Continuing their current growth, digital assets will only become further integrated into the economy.

"Americans need simplicity and clarity to own, trade, and use digital assets with confidence. Digital asset businesses, many of which are homegrown American innovations, need consistent rules tailored to digital assets.

"Our Committee's work has identified three key gaps in the current tax regime that make it harder for Americans to fully participate in the digital asset ecosystem.

• First, common digital asset transactions, like mining and staking, do not fit clearly into existing tax law. In other places, the tax code is silent as to the treatment of digital assets. The ambiguity creates an opening for taxpayers to exploit the law and avoid paying tax in some circumstances and creates unfair tax burdens in others.
• Second, digital assets do not receive the tax benefits nor the protection from anti-abuse rules long granted to traditional financial assets. The imbalance between digital assets and traditional financial assets creates a two-tier system that unintentionally favors certain assets over others.
• Third, crypto owners face burdensome tax compliance that makes using digital assets in ordinary commerce almost impossible. 31 percent of crypto owners would like to buy a cup of coffee at the local shop, yet each $5 cup of coffee bought with a digital asset generates two new pieces of tax paperwork. As a result, the IRS gets hundreds of millions of such tax forms each year, called 1099-DAs, that do little more than burden taxpayers.

"The Ways and Means Committee engaged in months of thoughtful discussion to build a lasting framework for digital asset taxation. The eight bills and discussion drafts we are examining today offer solutions to major challenges of clarity, parity, and administration in the tax code.

"The first bill we will examine lowers the tax burden on ordinary digital asset owners by excluding the small amount of gain or loss from tax reporting when a digital asset is used to pay network fees, like when checking out at the grocery store using crypto. This bill from Representative Rudy Yakym extends the same exclusion of gain or loss for minor fluctuations in regulated U.S. dollar stablecoins. Mr. Yakym's bill also grants taxpayers who frequently use certain digital assets the flexibility to choose to provide one combined annual income calculation for digital assets, instead of calculating gain or loss on each individual transaction. Together, these policies dramatically reduce the burdensome reporting currently required of taxpayers.

"The second bill introduced by Representative Mike Carey clarifies the tax treatment of mining and staking rewards by treating them as ordinary income but also allows miners and stakers to treat this income like self-created property, depending on which method best matches the timing and character of the rewards. The bill also provides a safe harbor for exchange-traded digital asset funds to receive staking rewards, which boosts the returns for Americans invested in these financial products.

"The next bills ensure that traditional financial assets and digital assets receive similar tax treatment. Legislation from Tax Subcommittee Chairman Mike Kelly removes the requirement that charitable donations of widely-traded digital assets undergo a qualified appraisal in order to claim a charitable tax deduction. By doing so, this bill applies the same treatment to digital asset donations that already applies to stocks that are traded on an established stock exchange

"Legislation from Congressman David Kustoff extends tax benefits available for traditional assets to digital assets. Our financial markets rely on these benefits to encourage foreign investment and improve liquidity. Under this bill, digital assets would be covered by the securities lending safe harbor, the securities trading safe harbor, and a special method of accounting for dealers and traders.

"Our hearing will also examine the application of longstanding anti-abuse rules to digital assets. These rules protect the integrity of tax filing and prevent bad actors from taking advantage of the tax code. Legislation from Representative Jodey Arrington extends anti-abuse rules to digital assets, so that the tax code treats investors in digital assets the same as other investors.

"The current landscape of vague laws paired with a high compliance burden make taxpayers fearful of correcting previous mistakes. Legislation offered by Representative Aaron Bean creates a limited, one-time disclosure program for taxpayers to voluntarily come into compliance for past digital asset tax filings. This bill does not eliminate interest on back due tax or the tax itself. But it does provide a simplified way to correct mistakes and reduces penalties for taxpayers who want a clean slate.

"We will also examine a discussion draft that ends a complicated scheme where taxpayers establish residency in a territory and then take advantage of complicated regulations to avoid paying capital gains tax on digital assets.

"Digital asset taxation does not have to turn into a partisan fight. I want to note the leadership of Congressman Miller and Congressman Horsford in showing digital asset taxation can be addressed in a bipartisan way. Representative Horsford has brought forth a discussion draft that looks at issues regarding mining and staking rewards and the charitable deduction.

"Other countries, like Singapore and Switzerland, have already implemented comprehensive tax regimes that offer clarity to digital asset owners. Congress must act now and enact clear tax rules to ensure America remains the global leader in digital assets.

"If Americans want to pay with a stablecoin, instead of a credit card or cash, they should be able to without a pile of tax paperwork. If a hairdresser, a gig worker, or a small business owner wants to accept digital assets as payment, they should not be treated any worse from a tax perspective than payment in cash or credit. Our tax system should not be picking the winners and losers. That is why these bills focus on removing the tax advantages and disadvantages for Americans who use digital assets.

"I want to thank our expert witnesses for being here, and I look forward to our discussion."