Web3 is yet to be fully regulated by law as governmental organizations are yet to decide whether digital assets are regarded as securities of something else. Until now, the current U.S. law didn’t provide tax rules addressing digital assets nor subjected cryptocurrencies under the current wash sale rules. However, the U.S. Treasury Department proposed a 30% crypto tax on the cost of powering mining facilities, as well as a tax provision to reduce wash sales trading by crypto investors.
Elimination of Tax Subsidies for Cryptocurrencies
In the 2024 budget proposal published by the White House Official website, U.S. President Joe Biden proposed a doubling of capital gains by implementing a provision on tax loss harvesting on crypto transactions. The change to the crypto tax treatment aims to raise approximately $24 billion according to the statement.
The proposal will put an end to the tax-loss harvesting strategy that allows crypto traders to offset tax losses. This type of tax abuse is usually subject to heavy regulations. Securities like stocks or bonds need to follow certain rules that stop them from taking advantage of tax losses. Cryptocurrencies and digital assets aren’t classified as securities yet, and thus, crypto investors managed to get away with this wash sale strategy.
However, the proposal put an end to tax subsidies for cryptocurrency transactions by “modernizing the tax code’s anti-abuse rules to apply to crypto assets just like they apply to stocks and other securities”.
What is Tax-Loss Harvesting?
The tax-loss harvesting is a wash sale scheme used by traders and investors in stocks, bonds, and recently cryptocurrencies. To offset taxation losses, investors sell a cryptocurrency at a loss, claim the loss on their taxes, and then buy the same cryptocurrency with the same initial amount. Realized capital losses from investments can be used to reduce the tax bill.
This is illegal in some countries, and the tax authority might reject the claimant from realizing a tax loss.
Biden’s Crypto Tax Proposal
In a Department of the Treasury supplementary budget explainer paper released on March 9, President Biden proposed a tax equal to 30% on the cost of powering crypto mining facilities.
The reasoning for this decision is that the computational effort involved in the crypto-mining process requires huge amounts of energy. Which would increase overall energy consumption and as a consequence, have a negative impact on the environment.
“Digital asset mining also creates uncertainty and risks to local utilities and communities, as mining activity is highly variable”.
The crypto tax came in as a way to reduce mining activity along with its associated environmental harm.
The proposed tax would target firms that use computing resources to mine digital assets on the costs of electricity used. “Firms engaged in digital asset mining would be required to report the amount and type of electricity used as well as the value of that electricity”.
However, the tax would be in phases over the next year, increasing by 10% each year.
One of the few surprises in the Biden budget. A proposed excise tax on electricity usage from crypto mining. Phasing in at 10% in year one and climbing to 30%. pic.twitter.com/UPgUdr8CeG
— John Buhl (@jbuhl35) March 9, 2023
Will Crypto Like Bitcoin Move to PoS?
But, what does this mean to cryptocurrencies and all digital assets? According to Punit Agarwal, Founder of KoinX, “mining profitability could decline, potentially leading to slower transaction processing times and increased vulnerability to attacks. This could have negative consequences for the security and stability of the cryptocurrency network.”
The mining activity might decrease and thus would generate a reduction in the network’s security. Also, if this tax was implemented in some regions only, this will create a competitive disadvantage.
However, according to Rajagopal Menon, Vice President of WazirX, “Such a tax could stifle innovation and growth in the cryptocurrency industry. Which has been a source of significant investment and job creation.”
This kind of tax will only target blockchains that still run on the proof-of-work consensus. Blockchains like Ethereum that implement the proof-of-stake mechanism will not be affected. That’s because their consensus relies on staking, which doesn’t require massive computational power. However, blockchains like Bitcoin, which is a PoW consensus, will be under the regulation of the 30% crypto tax. This might make Bitcoin consider a radical shift to PoS consensus, just like Ethereum did when implemented Ethereum 2.0.
What do you think about the Web3 undergoing such regulations? Here are some of the community’s responses.
🇺🇸 President Biden is proposing a 30% tax on crypto mining electricity usage.
It’s very exciting watching democrats ruin America.
— Layah Heilpern (@LayahHeilpern) March 10, 2023
How does the United States consistently stifle innovation is beyond me.
Now they are proposing a 30% tax on electricity used by miners to mine crypto.
— Benjamin Cowen (@intocryptoverse) March 10, 2023