Key digital asset tax proposals in the Biden administration’s green paper | McDermott Will & Emery

On March 28, 2022, the U.S. Department of the Treasury released the Fiscal Year 2023 Revenue Proposals and Green Paper, which outlines the Biden administration’s fiscal year 2023 budget tax proposals (Biden 2023 Budget Proposal). The 2023 draft budget, if passed in its current form, would expand the treatment of securities lending and mark-to-market tax accounting to include digital assets. It would also expand information reporting by certain financial institutions and brokers, as well as reporting requirements for certain taxpayers who hold foreign digital assets. However, the Green Paper does not include a definition of digital assets for these purposes. Accordingly, we expect “digital assets” to have the same meaning as new Section 6045(g)(3)(D) of the Internal Revenue Code (Code) of 1986, as amended. This article summarizes the main 2023 budget proposals regarding digital assets.

Section 1058 of the Code generally provides that a taxpayer does not recognize a gain or loss on securities lending if certain conditions are met, including:

  1. The return to the transferor of securities identical to the securities contributed
  2. Certain payments made to the transferor which the owner of the securities is entitled to receive during the term of the loan
  3. No reduction in the risk of loss or opportunity for gain of the transferor on the securities transferred.

For this purpose, “securities” means the shares, notes, bonds, debentures and other evidences of indebtedness of the company, together with any evidence of an interest in or right to purchase any of the foregoing. .

The 2023 budget proposal would extend the Code Section 1058 non-recognition to loans of actively traded digital assets that are recorded on cryptographically secured distributed ledgers, provided the loan has terms similar to those currently required for loans. securities lending as described above (for example, all digital assets received by the borrower as a result of airdrops or hard forks that occur during the loan will be transferred to the lender). The US Treasury Secretary would have the power to determine when a digital asset is actively traded, as well as the power to extend the rules to digital assets that are not actively traded.

Passing this proposal would provide taxpayers with assurance that a transfer of digital assets under a properly structured Code Section 1058 loan agreement would not result in a taxable disposition.


Article 475 of the Code obliges securities dealers to use the mark-to-market method for the tax accounting of securities held at the end of the year. Commodity traders and dealers in securities or commodities may choose to use the mark-to-market method. Under current law, it is unclear whether most digital assets would constitute “commodity” for the purposes of Code Section 475. As we noted earlier, Bitcoin and Ethereum are likely to be treated as commodities for these purposes because the futures contracts for these cryptocurrencies are traded on a commodity exchange. Additionally, since the tax definition of a commodity is based, in part, on how the Commodity Futures Trading Commission (CFTC) regulates cryptocurrencies and other digital assets, certain other cryptocurrencies and futures contracts could also be treated as commodities for tax purposes. (To see “Can a virtual currency position be treated as a commodity for tax purposes?”) However, based on existing guidance, the tax treatment of these other cryptocurrencies and futures is less certain.

The 2023 draft budget would add actively traded digital assets, including derivatives on – or hedges of actively traded digital assets, as an additional category of assets covered by Code Section 475. This would avoid the question of what is a commodity under the current law. is. Again, the Secretary of the Treasury would have the authority to determine which digital assets are treated as actively traded, taking into account relevant facts and circumstances, which may include whether the digital asset is regularly bought and sold for US dollars or other fiat currencies, the volume of trading the digital asset on exchanges that have reliable ratings and the availability of reliable price quotes.

Although the 2023 draft budget does not specify whether certain digital assets could be considered commodities under current law, it does indicate that digital assets are eligible for the market value election for the purposes of Article 475 of the Code. only whether this digital asset meets the requirements of an “actively traded digital asset”.


Under current law, Section 6038D of the Code requires individual taxpayers (and certain U.S. entities) who hold an interest in one or more “specified foreign financial assets” with an aggregate value of at least $50,000 at within a tax year attach a statement (currently provided on Internal Revenue Service (IRS) Form 8938, Statement of Specified Foreign Financial Assets) to the taxpayer’s federal income tax return. A “specified foreign financial asset” means (1) a financial account maintained by a foreign financial institution and (2) certain specified foreign assets not held in a financial account maintained by such a financial institution. In general, taxpayers are required to report the name and address of the financial institution where an account is held, the account number, and identifying information about assets not held in a financial account. Failure to provide the required information for a tax year may result in penalties.

The 2023 draft budget would expand the definition of “specified foreign financial assets” to include any account that holds digital assets managed by a foreign digital asset exchange or other foreign digital asset service provider (digital asset account foreign). A foreign digital asset account would be based on where the exchange or service provider is organized or established.


Generally, anyone doing business as a broker (that is to say, merchant, barter exchange, or person who, for consideration, regularly acts as an intermediary in goods or services) is required to report certain information about its customers to the IRS, such as the identity of each customer and the gross proceeds from the sale of certain securities and commodities. The recently enacted section 80603 of the Infrastructure Investment and Employment Act 2021 clarified that a broker includes any person who (for compensation) is engaged to regularly provide any service effecting transfers of digital assets on behalf of another person. For this purpose, the term “digital asset” means any digital representation of value that is recorded on a distributed ledger secured by cryptography or similar technology specified by the Secretary of the Treasury.

The 2023 budget proposal provides that broker-dealers, such as U.S. digital asset exchanges, would be required to report information about foreign principal owners of passive entities that hold digital assets. By adopting such rules, brokers would be required to report gross proceeds and other information the Secretary of the Treasury may require regarding the sale of digital assets with respect to customers and, in the case of certain passive entities, their main foreign owners.


In general, most of the proposals described herein take effect for taxation years beginning after December 31, 2022, with the exception of the broker rules, which would take effect for taxation years beginning after December 31, 2022. December 2023.

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Michael J. Birnbaum