President issues executive order on digital assets

| 3/10/2022
President issues executive order on digital assets

On March 9, President Joe Biden issued an executive order, “Executive Order on Ensuring Responsible Development of Digital Assets,” to facilitate a coordinated federal response to digital assets, including cryptocurrencies and related distributed ledger technology. While the executive order and accompanying fact sheet do not make specific reference to tax or the IRS, a number of directives identify the U.S. Department of the Treasury as either a primary agency or an agency providing consultation to other agencies; therefore, federal tax is likely to be addressed. Specifically, the executive order requires the secretary of the treasury to draft or contribute to the required reports for the president or to take other action, including:

  • A report on the future of money and payment systems, including design options for a U.S. central bank digital currency; steps to increase adoption by and identification of risks for consumers, investors, and businesses; as well as legislative proposals.
  • A report on the role of law enforcement agencies in detecting, investigating, and prosecuting criminal activity related to digital assets, including recommendations on regulatory or legislative actions. The IRS criminal investigation division is likely to continue its involvement with these efforts.
  • A report on the effect of digital assets and cryptocurrencies on energy use and climate, as well as opportunities to use blockchain and related technologies in climate response and energy management activities.
  • A convening of the Financial Stability Oversight Council and a report on financial stability issues, including recommendations for regulation, supervision, and legislation to mitigate risk.
  • A coordinated action plan that includes anti-money laundering and efforts to counter the financing of terrorism actions. Given its past involvement in this area, the IRS is likely to be part of this action item.
  • A framework for international engagement to develop standards and principals for digital assets.
  • A framework to enhance competitiveness and leverage the benefits of digital assets.
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In addition, the executive order defines the terms used. Given the lack of a comprehensive, widely accepted taxonomy in the digital space, these definitions could provide much-needed consistency in how the U.S. government refers to innovations in this ecosystem, and it could provide those that engage in this area a better understanding of what regulators, including Treasury and the IRS, are thinking. Following are the definitions included:

  • Blockchain. Distributed ledger technologies where data is shared across a network that creates a digital ledger of verified transactions or information among network participants and the data typically is linked using cryptography to maintain the integrity of the ledger and execute other functions, including transfer of ownership or value.
  • Central bank digital currency (CBDC). A form of digital money or monetary value, denominated in the national unit of account, that is a direct liability of the central bank.
  • Cryptocurrency. A digital asset that can be a medium of exchange for which generation or ownership records are supported through a distributed ledger technology that relies on cryptography, such as a blockchain. This definition is similar to the definition used by the IRS in frequently asked questions.
  • Digital assets. All CBDCs, regardless of the technology used, and other representations of value, financial assets and instruments, or claims that are used to make payments or investments, or to transmit or exchange funds or the equivalent thereof, that are issued or represented in digital form through the use of distributed ledger technology. For example, digital assets include cryptocurrencies, stablecoins, and CBDCs. Regardless of the label used, a digital asset may be, among other things, a security, a commodity, a derivative, or other financial product. Digital assets may be exchanged across digital asset trading platforms, including centralized and decentralized finance platforms, or through peer-to-peer technologies. This definition provides insight into how the IRS and Treasury regulations might define digital assets for purposes of recently enacted reporting requirements under IRC Section 6045 and IRC Section 6050I.
  • Stablecoins. A category of cryptocurrencies with mechanisms that are aimed at maintaining a stable value, such as by pegging the value of the coin to a specific currency, asset, or pool of assets or by algorithmically controlling supply in response to changes in demand in order to stabilize value.

Looking ahead

Treasury is a key player in the president’s agenda for responding to the growth of digital assets, harnessing their possibilities for doing good, and protecting against bad actors who would use the technology to commit crimes and threaten global stability. While not specifically mentioned, the IRS will be an integral part of Treasury’s efforts, though it is unclear what that will mean with regard to tax in the short term. The reports and other actions required by the executive order will lay the groundwork for future legislative, regulatory, and law enforcement actions.

In the meantime, legislative efforts around digital assets continue, including work to limit application of IRC digital asset reporting that was enacted as part of the Infrastructure Investment and Jobs Act. Also unclear is the fate of 2021 proposals included in the Build Back Better bill to extend IRC Section 1091 wash sale and IRC Section 1259 constructive sale rules to digital assets.

In addition to keeping an eye on developments in the legislative arena, participants in the digital asset ecosystem should expect guidance on digital asset reporting soon. States and foreign jurisdictions also are considering action around digital assets, and it will be important to see how these react to federal government developments. Taxpayers engaged in digital asset businesses and transactions should keep in close contact with their tax advisers to prepare for what appear to be significant changes in the status quo.

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Rochelle Hodes
Rochelle Hodes
Principal, Washington National Tax
Trudie Kanter
Trudie Kanter
Partner, Financial Services