Digital Asset Tax Certainty Act: Building on PARITY
How the proposed legislation would adapt longstanding tax rules to digital assets and address web3-native transactions
Overview
In the days following the CLARITY Act’s failure to obtain the votes needed to proceed to general debate in the Senate, the House Committee on Ways and Means advanced a separate digital asset tax bill: the Digital Asset Tax Certainty Act (DATCA). DATCA incorporates and revises significant portions of an earlier proposal, the Digital Asset Protection, Accountability, Regulation, Innovation, Taxation, and Yields Act, commonly known as the Digital Asset PARITY Act (PARITY).
Both proposals seek to reduce uncertainty by extending selected federal income tax rules that already apply in traditional financial markets to digital assets, while also creating targeted rules for transactions and activities that are native to digital asset markets. DATCA is considerably broader than PARITY. In addition to parity provisions for investors, traders, and funds, DATCA addresses transaction fees, simplified accounting, stablecoins, mining and staking, information reporting, and voluntary disclosure. This post highlights several provisions that are particularly relevant to digital asset market participants.
How DATCA Builds on PARITY
DATCA carries forward core parity provisions
PARITY supplied much of the conceptual foundation for DATCA. Both proposals would extend several familiar tax regimes to digital assets, including:
- the trading safe harbor for non-U.S. persons;
- the nonrecognition rules for qualifying lending transactions;
- mark-to-market accounting for eligible dealers and traders;
- the wash sale rules; and
- the constructive sale rules.
DATCA also includes a charitable-contribution provision, although it is structured and integrated into a broader bill that goes well beyond PARITY.
DATCA does not simply replicate PARITY
DATCA reorganizes and refines the PARITY framework and adds a number of provisions that did not appear in the earlier proposal. For example, DATCA includes rules for de minimis network and transaction fees, an elective simplified accounting method for widely traded digital assets, mining and staking income, investment trusts that stake digital assets, broker reporting, and a digital asset voluntary disclosure program. Accordingly, DATCA is best viewed as an expanded legislative package that uses PARITY as a starting point, rather than as a direct reintroduction of PARITY.
Provisions Relevant to Investment Funds and Traders
Trading safe harbor for non-U.S. persons
The trading safe harbor is particularly important for non-U.S. investors, including private fund structures that use offshore corporations. Under current practice, many tax advisers take the position that the existing commodities trading safe harbor applies to many digital assets. DATCA would remove uncertainty by expressly extending the safe harbor to qualifying digital asset trading activities. This clarification would provide greater confidence that trading through a U.S. broker, commission agent, custodian, digital asset exchange, or other independent agent does not, by itself, cause a non-U.S. person to be engaged in a U.S. trade or business.
Mark-to-market accounting
DATCA would also allow eligible dealers and traders to elect mark-to-market treatment for covered digital assets. Although some taxpayers may currently take the position that digital assets qualify as commodities for this purpose, the statute does not expressly address digital assets. The proposed rule would provide a clearer path for eligible taxpayers to recognize annual ordinary gain or loss based on fair market value, subject to the bill’s definitions, elections, and exceptions.
Lending, wash sales, and constructive sales
Existing securities-lending, wash sale, and constructive sale rules generally are drafted by reference to stocks, securities, or other specifically identified financial instruments. Their application to digital assets therefore can be limited or uncertain. DATCA would extend these regimes to specified categories of digital assets. The lending provision would permit nonrecognition for qualifying transfers of traded digital assets under an agreement requiring the return of identical assets and preserving the transferor’s economic position. The wash sale and constructive sale provisions would apply established anti-abuse principles to covered digital asset transactions. Collectively, these changes would move the tax treatment of digital asset investment activity closer to the treatment of economically comparable traditional financial transactions.
Rules for Digital Asset Transactions
U.S. dollar stablecoin transactions
DATCA would create a special regime for “qualified U.S. dollar stablecoins,” generally covering U.S. dollar payment stablecoins issued by permitted issuers, including certain registered foreign issuers. For a qualifying acquisition, the taxpayer’s basis generally would equal the stablecoin’s redemption value if the consideration provided is not less than 99.5 percent of that value. Corresponding valuation rules would generally treat the stablecoin as having a value equal to its redemption value when it is acquired or disposed of within a narrow band around par. In practical terms, these rules are intended to prevent immaterial fluctuations around one dollar from producing gain or loss and burdensome basis calculations in ordinary stablecoin transactions.
The proposed rules contain important limitations. The special treatment generally would not apply to stablecoin traders, brokers, or dealers, certain similar businesses, taxpayers exceeding specified transaction thresholds, or taxpayers and qualified business units using a non-dollar functional currency. DATCA would also narrow broker basis-reporting requirements for qualifying stablecoins. If enacted as introduced, the substantive stablecoin rules would apply to taxable years beginning after December 31, 2026.
Investment trusts and ETF staking
DATCA would provide statutory protection for investment trusts, including digital asset exchange-traded products that are treated as grantor trusts, when they stake assets held by the trust. An entity would not fail to qualify as a trust solely because the trustee has authority to stake digital assets, retain or distribute staking rewards, choose which trust assets to stake, and take steps to maintain liquidity for redemptions, including borrowing or arranging to borrow money or digital assets. The proposal would not protect an entity that actively conducts a trade or business of validating digital asset transactions.
This provision would reduce the risk that staking activity causes an investment trust to be reclassified as a partnership or corporation for federal income tax purposes. It would also place the treatment of staking by qualifying investment trusts on a statutory footing rather than relying exclusively on administrative guidance. If enacted as introduced, the provision would apply to taxable years ending after the date of enactment.
Conclusion
Seward & Kissel LLP actively monitors legal and regulatory changes and their impact on the digital assets industry. For additional information, please contact a member of Seward & Kissel’s Digital Assets Group.
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