The Crypto Tax Bill Gets Block Rewards Wrong
A markup in the Ways and Means Committee today perpetuates the legal mistake made by the IRS
The House Ways and Means Committee is considering a crypto tax bill today that addresses many of Coin Center’s priorities. There are thoughtful provisions we support, including continued progress on a simplified accounting method that would greatly ease the burden on everyday crypto users. But on one longstanding issue—the taxation of newly created block rewards—the effort to find political compromise risks leaving us worse off.
If Congress cannot agree on whether creating a token produces taxable income, it should leave that question open. Unfortunately, the remaining language leans on the same mistaken premise as IRS guidance from 2014 and 2023 that creating new tokens produces income, rather than property that may generate income when sold.
First, some context.
Last year, I launched a token as part of a demo for a senior government official to show how easy it is for anyone to deploy a smart contract. I have a secret to reveal: I did not pay taxes on those tokens when I created them.
You might argue that there was no tax to pay because they were worthless. But I’ve seen plenty of equally worthless tokens get immediate valuations in this sometimes stupid crypto economy. The more fundamental reason is that creating property does not, by itself, produce income. I interacted with the Ethereum protocol and created these tokens just as if I had taken my kid’s construction paper and cut it up to make Jason Dollars (in order to build a self-sustaining economy).
Our position is that the same principle applies to newly created block rewards. When miners or validators help add blocks to a blockchain, the protocol’s rules allow them to create new tokens to come into existence. Those newly created tokens are distinct from tokens received from some third party source, which would be taxable. They are property produced through the participant’s activity, not income.
I have explained this distinction in Congressional hearings, news articles, and just about every other public forum available to me.
In Washington, the debate has often been framed as a question of “timing”: should taxpayers be able to wait until they sell their block rewards to pay tax, or should they have to recognize income after a fixed period, such as five years?
That framing misunderstands the fundamental issue. We are not simply asking for more time to pay tax on income. We are arguing that the creation of these tokens is not an income event in the first place.
Without political consensus, the committee dropped the proposed deferral provision. Our understanding was that this would leave the underlying question open for the courts and the IRS to address under existing law.
Unfortunately, the remaining provisions risk undermining that approach. Section 401 of the bill explicitly refers to the source and character of “mining and staking income,” including mandating that “[i]ncome from digital asset validation supporting activities” be treated as ordinary income (rather than capital gains).
The provision does not expressly say when that income arises. But describing validation as producing income assumes the answer to the question Congress supposedly chose to leave unresolved. Before deciding what kind of income something is, we need to establish whether there is income at all.
If this language becomes law, it could be seen as congressional endorsement of the IRS’s mistaken position that newly created rewards are income. Coin Center has been supporting the Jarrett lawsuit that challenges this guidance and is teed up for a summary judgment decision in the coming months.
We would have welcomed a congressional solution affirming the proper treatment of newly created property. But if that agreement is not possible, the bill should at least preserve the existing legal debate.
We greatly appreciate the committee’s extensive engagement with us and the work that has gone into the bill. There may be ways to preserve other provisions relating to block rewards while making clear that Congress is not deciding whether or when block rewards constitute income. To the extent that the bill proceeds past committee, it is important that we find a way to clarify this issue. A bill intended to provide tax certainty should not undermine a position Coin Center has spent years working to establish without squarely addressing the question itself.