President Biden in March released his budget proposal for fiscal year 2025. In it, he proposed three changes to the way federal law operates with respect to cryptocurrency. There are some good changes, such as the application of existing securities regulations to crypto. But there is also one bad change — namely, a special tax on crypto mining.
Firstly, the proposal contains two regulatory changes. First is the elimination of a tax loophole that allows cryptocurrency traders to write off losses on assets they sell and then quickly rebuy. Second is the implementation of security loan nonrecognition rules to actively-traded crypto asset loans.
The first change simply expands existing rules for stock and bond trading to cryptocurrencies. This is a great example of the government creating an even playing field for similar asset classes without creating new cumbersome and bureaucratic regimes.
Currently, stocks sold at a loss cannot be re-purchased in less than 30 days. If traders repurchase those stocks, they cannot deduct the loss on their taxes — a practice known as wash trading.
With crypto, the rule is more ambiguous. It isn’t clear under the current regulatory regime when traders can buy their crypto back, but they often do so in much less than 30 days. They realize their losses for tax purposes and then immediately buy those same crypto assets back, functionally realizing a loss without actually losing those assets. The discrepancy between stocks and crypto is a result of slow regulatory application and not because of fundamental differences between crypto and securities.
The second modification follows a similar program and applies securities regulations to crypto trading, which operates very similarly. Though this is not to say crypto trading and traditional financial markets are one-for-one, the similarities allow policymakers to carry over regulation from traditional finance to crypto when appropriate. In this instance, when loaning out traditional securities, like pensions and mutual funds, the one making the loan will not be required to recognize losses and gains if they received back essentially the same securities. Extending this rule to digital assets will make many of these loans tax-free, like securities.
Both Biden administration proposals are examples of the expansion of regulatory applications without a new agency being created or undue burdens being applied to the budding crypto industry.
Unfortunately, Biden’s proposal for a crypto mining tax takes the opposite approach to crypto.
Bitcoin exists on digital ledgers, which are hosted on a million computers. To update the ledger with new transactions, these millions of computers compete to validate those transactions. This is called mining, and the validating terminal is rewarded with Bitcoin.
Mining is essential to any decentralized cryptocurrency since it provides the incentive to host and update the Bitcoin ledger. Without mining, Bitcoin and other cryptocurrencies would need a centralized hub, like fintechs and online banking. The utility of a decentralized method for transferring assets is the removal of a single point of failure or control.
Biden’s proposal would impose a 30 percent tax on electricity used in all crypto mining, even if that electricity is off the grid and internally sourced. This would dramatically increase costs for mining in the United States, forcing many miners to operate overseas. Like China’s ban on crypto trading, this will not lead to the end of American crypto usage. Instead, it will simply force innovators in the space to consider operating in countries with friendlier regulatory environments.
The plan seems clearly aimed at satisfying the environmental concerns many activists have expressed regarding crypto mining. But it is ill-conceived, making no distinction between electricity sourced privately and sustainably, and electricity leased from nonrenewable sources. The 30 percent threshold is also excessive, massively increasing the cost of crypto mining which could easily be offshored given crypto’s international reach.
The Biden administration shouldn’t soil its otherwise positive regulatory changes with a large punitive tax on mining. With the regulatory space in need of some massive, but common-sense, changes, it’s easy for the administration to score a win simply by applying rules used in securities trading to crypto. Some light-touch reforms in this area could be very beneficial in alleviating these issues.
