President Biden recently unveiled his budget proposal for fiscal year 2025, which includes several changes to federal cryptocurrency regulations. While some of these changes are positive, such as the application of existing securities regulations to the crypto industry, there is one change that raises concerns – a special tax on crypto mining.
The proposal includes two regulatory changes. The first change aims to eliminate a tax loophole that allows traders to write off losses on cryptocurrency assets they sell and quickly rebuy. This change aligns with existing rules for stock and bond trading, creating a level playing field for different asset classes without introducing new bureaucratic systems.
Currently, stocks sold at a loss cannot be repurchased within 30 days if traders want to deduct the loss on their taxes. However, the rules regarding crypto trading are more ambiguous, and traders often repurchase their crypto assets within a shorter timeframe. By realizing their losses for tax purposes and immediately buying back the same assets, traders effectively claim a loss without actually losing the assets. This discrepancy between stocks and crypto is due to slow regulatory application rather than fundamental differences between the two markets.
The second regulatory change applies securities regulations to crypto trading, recognizing the similarities between these markets. While crypto trading and traditional financial markets are not identical, policymakers can adapt regulations from traditional finance to the crypto industry when appropriate. For instance, when loaning out traditional securities, the lender is not required to recognize losses and gains if they receive back essentially the same securities. Extending this rule to digital assets would make many of these loans tax-free, similar to securities.
Both of these proposals demonstrate the expansion of regulatory applications without the need for new agencies or burdensome regulations on the crypto industry.
Unfortunately, President Biden’s proposal for a crypto mining tax takes a different approach. Bitcoin and other cryptocurrencies rely on mining, where computers compete to validate transactions and update the digital ledgers. This mining process is crucial for decentralized cryptocurrencies as it incentivizes the hosting and updating of the ledger. Without mining, cryptocurrencies would require a centralized hub, undermining their decentralized nature.
Biden’s proposal would impose a 30 percent tax on electricity used in all crypto mining, even if the electricity is off the grid and internally sourced. This tax would significantly increase mining costs in the United States, potentially driving miners to operate overseas. Like China’s ban on crypto trading, this tax would not eliminate American crypto usage but would push innovators to seek more favorable regulatory environments abroad.
While the proposal aims to address environmental concerns related to crypto mining, it fails to distinguish between privately and sustainably sourced electricity and electricity obtained from nonrenewable sources. Additionally, the 30 percent tax threshold is excessive and would substantially raise the cost of crypto mining, making it easier for miners to relocate operations to countries with friendlier regulations.
The Biden administration should not tarnish its positive regulatory changes with a punitive tax on mining. Instead, it should focus on implementing common-sense reforms that align with rules used in securities trading. Light-touch reforms in this area could effectively address these issues and benefit the crypto industry.
Isaac Schick, a policy analyst at the American Consumer Institute, holds a master’s degree in public policy from California Polytechnic State University. The views expressed in this article are his own and should not be considered legal or investment advice.