Tax Clarity for Mining and Staking Act

This Act may be cited as the Tax Clarity for Mining and Staking Act.

Except as otherwise expressly provided, whenever in this Act an amendment or repeal is expressed in terms of an amendment to, or repeal of, a section or other provision, the reference shall be considered to be made to a section or other provision of the Internal Revenue Code of 1986.

The table of contents for this Act is as follows:

Chapter 1 is amended by inserting after subchapter V the following new subchapter:

In the case of the acquisition of any newly minted digital asset—

(1) the fair market value of such asset shall be included in the taxpayer’s gross income as ordinary income as of the time of such acquisition, and

(2) the amount included in gross income under paragraph (1) shall be properly taken into account in determining the taxpayer’s basis in such asset.

Notwithstanding any provision of this title (other than paragraph (2) and section 1400W-2), specified acquisition costs shall be treated as an expense which is not chargeable to capital account.

The Secretary may issue regulations or other guidance which allow specified acquisition costs to be chargeable to capital account if such treatment would be consistent with the treatment of such costs for purposes of the applicable financial statement (as defined in section 451(b)(3)) of the taxpayer.

Notwithstanding section 1400W-1, in the case of any taxpayer for any taxable year to which an election under subsection (e) applies—

(1) all qualified newly minted digital assets acquired by such taxpayer during such taxable year shall not be included in the taxpayer’s gross income by reason of such acquisition, and

(2) specified acquisition costs paid or incurred during such taxable year shall be chargeable to capital account with respect to qualified newly minted digital assets in accordance with the rules provided in subsection (c) (and no deduction shall otherwise be allowed under this subtitle with respect to such costs).

In the case of a disposition of any qualified newly minted digital asset—

(A) any gain on such disposition shall be—

(i) recognized notwithstanding any other provision of this subtitle, and

(ii) treated as gain from the disposition of property which is not a capital asset, and

(B) any loss on such disposition shall be treated as loss from the disposition of property which is not a capital asset to the extent that such loss exceeds the portion of the basis of such property that is not attributable to specified acquisition costs.

Paragraph (1) shall not apply to—

(A) any disposition to which section 1058 applies, and

(B) to the extent provided by the Secretary, any disposition which is a nonrecognition transaction described in subchapter C or K.

In the case of any disposition of a qualified newly minted digital asset with respect to which gain is recognized by the transferor under paragraph (1), if the basis of such asset in the hands of the transferee is determined by reference to the basis of such asset in the hands of the transferor, proper adjustments shall be made in the determination of basis to take into account such gain.

For purposes of this section, the Secretary shall provide rules for the proper allocation of specified acquisition costs among qualified newly minted digital assets.

The rules provided under paragraph (1) shall include rules that provide for the proper deduction of specified acquisition costs which are not otherwise allocated to qualified newly minted digital assets pursuant to such rules because the taxpayer indefinitely ceases all activities related to the validation of digital assets (including staking and mining).

For purposes of this section—

The term qualified newly minted digital assets means, with respect to any taxpayer for any taxable year, any newly minted digital asset (determined without regard to subparagraph (B) of section 1400W-3(a)(1)) acquired by such taxpayer during such taxable year if—

(A) the election under subsection (e) applies to such taxpayer for such taxable year, and

(B) the taxpayer—

(i) in the case of any such newly minted digital asset issued in connection with a validation of digital asset transactions which was not supported by the staking of digital assets—

(I) is the person who validated such digital asset transactions, and

(II) is the first owner of such newly minted digital asset, or

(ii) in the case of any such newly minted digital asset issued in connection with a validation of digital asset transactions which was supported by the staking of digital assets—

(I) is the person who holds the digital assets that were so staked, and

(II) either is the first owner of such newly minted digital asset or acquired such newly minted digital asset promptly after such newly minted digital asset was issued.

For purposes of paragraph (1)(B)(ii)(I), if a digital asset is lent to any person, such person (and not the person lending such asset) shall be treated as holding such asset.

An election under this section shall apply for the taxable year for which it is made and for each taxable year thereafter unless revoked with the consent of the Secretary. Such election shall be made at such time and in such manner as the Secretary may provide.

In the case of any partnership or S corporation, the election under this section shall be made at the partnership or S corporation level.

A taxpayer making an election under this section shall be treated for purposes of section 481 as making a change in method of accounting which is initiated by the taxpayer and made with the consent of the Secretary. Such change shall be applied only on a cut-off basis, and no adjustments shall be made under section 481(a).

This section shall not apply to—

(1) any controlled foreign corporation or any passive foreign investment company (as defined in section 1297),

(2) except as otherwise provided by the Secretary—

(A) any foreign trust, and

(B) any partnership in which one or more controlled foreign corporations, passive foreign investment companies (as so defined), or foreign trusts are partners in such partnership, and

(3) to the extent provided by the Secretary, any partnership or trust if one or more entities described in paragraph (2)(B) are indirectly partners in such partnership or direct or indirect beneficiaries of such trust.

The regulations or other guidance issued by the Secretary under section 1400W-3(c) may include regulations or other guidance providing rules for the application of this section with respect to digital assets owned through a widely traded fixed investment trust, including regulations or other guidance—

(1) modifying information reporting requirements or requiring additional information reporting with respect to newly minted digital assets acquired through such a trust,

(2) providing reasonable methods for brokers (or any other person required to report information with respect to such a trust) to determine and report the portion of the interest in such a trust that results from the acquisition of newly minted digital assets during a taxpayer’s holding period,

(3) requiring owners of interests in such a trust to notify the broker (or any other person required to report information with respect to such a trust) whether an election has been made under subsection (e),

(4) providing rules for the appropriate allocation of basis to the portion of the interest in such a trust that is attributable to the acquisition of newly minted digital assets, including by requiring the allocation of any basis (other than specified acquisition costs required to be capitalized under this section) to a taxpayer’s other interests in such a trust,

(5) providing rules to reduce administrative and compliance burdens by providing for aggregation, approximation, or other reasonable methods to compute and report gain attributable to newly minted digital assets acquired through such a trust, and

(6) defining the widely traded fixed investment trusts to which the regulations or other guidance under this subsection applies.

For purposes of this subchapter—

The term newly minted digital asset means any digital asset that is issued in connection with the validation of digital asset transactions (including digital asset validation supporting activities) and that (prior to such issuance) was not owned by any person.

A digital asset shall not be treated as a newly minted digital asset at any time after the disposition of such asset by the first owner of such asset.

Except as otherwise provided pursuant to clause (ii), a taxpayer may use any reasonable method to determine whether a digital asset acquired by the taxpayer is a newly minted digital asset.

The Secretary may issue such regulations or other guidance as the Secretary determines necessary or appropriate specifying methods that are, or are not, reasonable for purposes of clause (i).

The term specified acquisition costs means any amount paid or incurred in connection with validating any digital asset transaction if, at the time such amount is paid or incurred there is a reasonable possibility that the taxpayer will acquire a newly minted digital asset in connection with such validation. Such term shall not include any amount unless such amount would (without regard to this subchapter) be either allowable as a deduction or chargeable to capital account.

For purposes of subparagraph (A), the term amount paid or incurred in connection with validating any digital asset transaction includes any amount paid or incurred in connection with the activity of validating, or attempting to validate, any digital asset transaction, including—

(i) the direct costs of such activity,

(ii) indirect costs allocable to such activity,

(iii) fees paid or incurred to another party to carry out such activity, and

(iv) interest costs allocable to such activity.

For purposes of this subchapter—

A person shall be treated as acquiring a newly minted digital asset in any case where such person comes to possess such asset and without regard to the manner in which such person comes to possess such asset.

The following shall not fail to be treated as a disposition for purposes of this subchapter:

(A) The distribution of any digital asset from a trust to a beneficiary.

(B) The transfer of any digital asset from a decedent (whether or not incident to the decedent’s death).

The Secretary shall issue such regulations or other guidance as may be necessary or appropriate to carry out the purposes of this subchapter, including to prevent the abuse of the provisions of this subchapter.

Section 863 is amended by adding at the end the following new subsection:

Income from the acquisition of any digital asset received in connection with the validation of digital asset transactions (including digital asset validation supporting activities) shall be sourced—

(A) in the United States if the taxpayer is a United States resident at the time of acquisition, and

(B) outside the United States if the taxpayer is a nonresident at the time of acquisition.

Income described in section 1400W-2(b) shall be sourced—

(A) in the United States if the taxpayer is a United States resident at the time of disposition, and

(B) outside the United States if the taxpayer is a nonresident at the time of disposition.

In the case of a United States person with a qualified business unit (as defined in section 989(a)) in a foreign country, income described in paragraph (1) or (2) that constitute business profits attributable to such unit shall be sourced outside the United States.

In the case of a person that is not a United States person and that maintains an office or other fixed place of business in the United States, income described in paragraph (1) or (2) attributable to such office or other fixed place of business shall be sourced in the United States.

For purposes of subparagraphs (A) and (B), the Secretary may issue such regulations or other guidance as the Secretary determines necessary or appropriate for purposes of determining the amount of business profits attributable to a qualified business unit or office or other fixed place of business.

In the case of a partnership, except as otherwise provided by the Secretary in regulations or other guidance, this subsection shall be applied at the partner level.

For purposes of this subsection, the terms United States resident and nonresident have the meaning given such terms, respectively, in section 865(g)(1), determined after application of section 865(g)(2).

Section 751(c) is amended in the flush language at the end—

(1) by striking and an oil, gas, or geothermal property (described in section 1254) and inserting an oil, gas or geothermal property (described in section 1254), and qualified newly minted digital assets (as defined in section 1400W-2(d)), and

(2) by striking or 1254(a) and inserting 1254(a), or 1400W-2(b)(1)(A).

Section 199A(c)(3)(B) is amended by redesignating clause (vii) as clause (x) and inserting after clause (vi) the following new clauses:

(vii) Any item of gain or loss on the disposition of any newly minted digital asset (as defined in section 1400W-3(a)(1)).

(viii) Any item of income includible in gross income under section 1400W-1(a)(1).

(ix) Any item of gain realized under subsection (a) or (b) of section 751 by reason of the references in section 751(c) to qualified newly minted digital assets (as defined in section 1400W-2(d) and to 1400W-2(b)(1)(A).

The table of subchapters for chapter 1 is amended by inserting after the item relating to subchapter V the following new item:

The amendments made by this section shall apply to assets acquired in taxable years beginning after the date of the enactment of this Act.

Nothing in this section (or any amendment made by this section) shall be construed to create any inference with respect to the proper application of any provision of the Internal Revenue Code of 1986 with respect to any newly minted digital asset (as defined 1400W-3 of such Code, as added by this section) acquired in any taxable year beginning on or before the date of the enactment of this Act.

Section 7701(p), as added by section 4 of this Act, is amended by adding at the end the following new paragraph:

An entity or arrangement shall not fail to be treated as a trust for purposes of this title solely by reason of the power of the trustee of such entity or under such arrangement to—

(i) engage in staking digital assets held by the trust,

(ii) retain or distribute digital assets received in connection with such staking,

(iii) determine which digital assets held by the trust to use in staking,

(iv) to the extent that any digital assets held by the trust are committed to staking, take measures necessary or appropriate to ensure that the trust has sufficient liquidity to make distributions in redemption of interests in the trust, including by purchasing the right to borrow money or digital assets to make such distributions, and

(v) perform acts related to the exercise of the powers described in the preceding clauses of this subparagraph.

Subparagraph (A) shall not apply in the case of an entity or arrangement engaged in the active conduct of a trade or business of validating digital asset transactions.

The Secretary may prescribe such regulations or other guidance as may be necessary or appropriate to carry out the purposes of this paragraph.

The heading for section 7701(p), as added by section 4 of this Act, is amended by inserting and special rules after Definitions.

The amendments made by this section shall apply to taxable years ending after the date of the enactment of this Act.