Cryptocurrency tax policy: Timely reform?

* Senators are calling on the Treasury Department to exclude unrealized gains from cryptocurrency from the CAMT tax calculation.

• CAMT and new accounting regulations risk driving U.S. cryptocurrency companies overseas.

The growing divide between cryptocurrency innovation and federal tax policy has fueled urgent reform demands from cryptocurrency-friendly lawmakers.

Senator Cynthia Lummis and Bernie Moreno oppose the Biden administration's (CAMT) corporate alternative minimum tax. They warn that it could create a significant tax burden for U.S. cryptocurrency companies. These companies may have to pay taxes despite not making any profits.

In a letter to Treasury Secretary Scott Bessent, senators called for a reassessment of the impact of CAMT on the accounting of digital assets. They argued that current policies distort financial reporting.

This approach unfairly punishes companies that adopt new technologies.

Legislators further stated,

"The failure to clarify unrealized profits from digital assets could force companies to sell assets just to pay taxes, and it will deter institutions from holding large amounts of digital assets."

What is the new tax proposal?

The CAMT rule applies a 15% minimum tax for companies with an average AFSI of 1 billion USD or more. This threshold is calculated over three years. It can have a significant impact on cryptocurrency companies holding digital assets on their balance sheets.

Therefore, Lummis added that,

"Our advantage in digital finance is at risk if U.S. companies are taxed more than their foreign competitors. @berniemoreno & I have called on @USTreasury to remove the unnecessary tax burden on U.S. digital asset companies."

She added,

"To lead the world in digital assets, we need a level playing field."

It is expected that Lummis' proposal for cryptocurrency taxation aims to protect companies from being taxed on unrealized profits by excluding these fluctuations from the calculation of Adjusted Financial Reporting Income (AFSI) according to CAMT.

This move is a direct response to ASU 2023-08 of the Financial Accounting Standards Board, which requires companies to recognize digital assets at market value.

Challenges Ahead

However, although initially praised for improving transparency, this accounting change, combined with the CAMT framework, risks increasing taxable income with unrealized gains from cryptocurrency.

Lawmakers believe this could lead to a disproportionate tax burden, ultimately discouraging investment in digital assets and driving blockchain innovation overseas.

Senators further commented,

"This is not something that Congress or FASB planned for. This is an unintended consequence of having a tax base based on the decisions of private organizations... not based on the principle of taxation."

However, despite the ongoing political talk, market sentiment shows limited optimism towards broader tax reform.

Data from Polymarket shows a 1% chance that President Donald Trump will eliminate the capital gains tax on cryptocurrency before June.

This follows Senator Lummis's recent reintroduction of the BITCOIN Act, aimed at establishing a national Bitcoin reserve [BTC] and empowering the Department of Fintech to accumulate up to 1 million BTC over five years.

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