Biden’s 2024 Budget Plan Targets Digital Asset Miners and Wash Sale Rules

At a glance

• Main takeaway: President Biden’s 2024 budget proposed significant changes that impact the blockchain industry.
• Impact on your business: The budget proposals are expected to significantly increase the operational cost for digital asset miners and mining services providers; and reduce tax planning opportunities for digital asset investors and traders.
• Next steps: Aprio’s Technology and Blockchain team can help you comply with government regulation around cryptocurrency.

Schedule a consultation with Aprio today.

The full story:

On March 9, 2023, President Joe Biden unveiled his 2024 budget, which proposed significant changes impacting the digital assets / blockchain industry. The budget proposal impacting the ecosystem is consistent with the March 9, 2022 Executive Order on digital assets.

The budget aims to reduce the federal government deficit over the next ten years by raising tax revenues by almost $3 trillion. These two blockchain tax proposals are expected to raise approximately $26 billion in additional tax revenues.

How budget changes impact the cryptocurrency and blockchain ecosystem

Under the FY 2024 budget proposal:

• Digital asset miners will be subject to a 30% tax on electricity, which will be phased in over a 3-year period effective January 2024. 
• Beginning in 2024, the wash sale rules under section 1091 of the Internal Revenue Code will be expanded to include digital assets, effectively closing the tax loss harvesting strategy for digital asset investors and traders. Generally, Wash Sale Rules prevent taxpayers from taking a loss on the sale of a security if that same security or a substantially identical one is then bought within the same 30-day period.

The budget proposals are expected to: 1) significantly increase the operational cost for digital asset miners and mining services providers; and 2) reduce tax planning opportunities for digital asset investors and traders.

The proposed budget is not yet law

At present, the FY 2024 budget is not the law of the land. To become law, the budget must be passed by both chambers of Congress; proceed through budget resolutions, appropriations and conference committee/reconciliation procedures; and be signed by the President.

Digging deeper: digital asset mining energy tax

The first change is a proposed digital asset mining energy tax, which would introduce a 30% excise tax levy on electricity used to mine digital assets. This tax would affect digital asset miners who purchase electricity directly, as well as those who lease mining power, and those who use off-grid self-generated electricity.

Biden’s policy intent is to reduce digital asset mining activities in the United States and its environmental impact. The proposed tax would become effective in January 2024 and would be phased in over a three-year period, with a 10% rate in year 1, a 20% rate in year 2, and a 30% rate in year 3.

Missing from the proposal is savings for miners who may use clean energy; their companies would also be subject to this tax.

This provision is estimated to cost taxpayers $3.5 billion in tax over the next 10 years.

Wash Sale Rule will apply to digital assets transactions

The second change is the proposed expansion of the Wash Sale Rule to include digital assets. Under the current Wash Sale Rule (section 1091 of the Internal Revenue code), a loss of stocks or securities is deemed disallowable when the same or substantially similar stock or security is purchased within 30 days before or after the sale (commonly known as a ‘wash sale’).

Digital asset traders are currently able to harvest losses as a trading strategy since the current law only applies to stocks and securities. However, under the 2024 budget proposal, the definition under section 1091 would be expanded to include “Digital Assets,” which would close the current loophole available to digital asset traders.

It is important to note that to the extent some digital assets are securities today, the current rules could apply.

This proposed change would be effective for trades occurring on January 1, 2024, forward. This provision is estimated to cost taxpayers $23.5 billion in tax over the next 10 years. 

The lack of a wash sale has resulted in massive trading of digital assets as prices rise and then fall.  This change was included in tax legislation that failed to pass in 2022. This provision is estimated to cost taxpayers $23.5 billion in tax over the next 10 years.

The bottom line

The 2024 budget plan proposed by President Biden includes two significant changes affecting the taxation of the crypto industry. These changes would increase tax revenue from the industry and reduce the environmental impact of digital asset mining. The changes would become effective from January 2024 and would be phased in over a three-year period.

Related Resources/Assets/Aprio.com articles/pages

Could two common controls have prevented the fall of FTX?

Big changes for the crypto world

Technology and Blockchain CPA Services

Aprio’s Technology and Blockchain CPA Services team can help you comply with government regulation around cryptocurrency and digital assets. Schedule a consultation today!

Disclosures

Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding this matter.