TaxDAO’s Response to the US Senate’s Question on Digital Asset Taxation

Author: TaxDAO

On July 11, 2023, the U.S. Senate Finance Committee issued a solicitation letter to the digital asset community and other stakeholders to understand how to appropriately handle transactions and income from digital assets under federal tax law. The open letter raised a series of issues, including whether digital assets should be calculated based on market value, how to pay taxes on digital asset loans, etc. Based on the principle that tax policies should be loose and flexible, TaxDAO addresses these issues A corresponding response was made and a response document was submitted to the Finance Committee on September 5. We will continue to follow up on the progress of this important issue and look forward to maintaining close cooperation with all parties. Everyone is welcome to pay attention, communicate and discuss!

The following is the full text of TaxDAO’s response:

TaxDAO’s response to the U.S. Senate Finance Committee’s issue on digital asset taxation

September 5, 2023

To the Finance Committee:

TaxDAO welcomes the opportunity to comment on the Treasury Committee’s concerns regarding the intersection of digital assets and tax law. Respond to key questions. TaxDAO was founded by the former tax director and financial director of a unicorn in the blockchain industry. It has handled hundreds of financial and taxation cases in the Web3 industry, with a total amount of tens of billions. It is a rare organization that is extremely professional in both Web3 and finance and taxation. TaxDAO hopes to help the community better deal with tax compliance issues, bridge the gap between tax regulation and industry, and conduct basic research and construction in the relatively early stages of industry tax regulation to help the industry's future compliance development.

We believe that at the moment when digital assets are in the ascendant, loose and flexible tax policies will be beneficial As the industry grows, therefore, while conducting tax supervision on digital asset transactions, it is necessary to take into account the simplicity and convenience of tax operations. At the same time, we also recommend unifying the conceptual definition of digital assets to facilitate regulatory and tax operations. Based on this principle, we respond as follows.

We look forward to working with and supporting the Treasury Council to bring positive changes to the taxation of digital assets and promote sustainable economic development.

sincerely,

Leslie TaxDAO Senior Tax Analyst

Calix TaxDAO Founder

Anita TaxDAO Head of Content

Jack TaxDAO Head of Operation

1. Mark-to-market traders and dealers (IRC Section 475)

a) Should traders of digital assets be allowed to mark to market? Why?

b) Should dealers in digital assets be allowed or required to mark to market? Why?

c) Should the answer (to both questions above) depend on the type of digital asset? How is it determined that a digital asset is actively traded (under IRC Section 475(e)(2)(A))?

In general, we do not recommend traders or dealers of digital assets to mark-to-market. Our reasons are as follows:

First, actively traded crypto-assets are characterized by high volatility in asset prices, so mark-to-market tax consequences will increase the burden on taxpayers.

In the case of mark-to-market valuation, if the taxpayer fails to convert the encrypted assets in time before the end of the tax year, it may result in the disposal price of the encrypted assets being lower than the tax payment. (For example, a trader buys 1 bitcoin on September 1, 2023 at a market price of $10,000; a bitcoin market price of $20,000 on December 31, 2023; a trader sells a bitcoin on January 31, 2024 currency, the market price is USD 15,000. At this time, the trader has only obtained a profit of USD 5,000, but recognized a taxable income of USD 10,000.)

However, if the trader’s losses on the same digital asset can be deducted from the recognized taxable income after the taxable income is confirmed, the mark-to-market method can also be adopted. However, this accounting method will increase tax operations and is not conducive to facilitating transactions. Therefore, we do not recommend that traders or dealers of digital assets mark-to-market.

Second, the (average) fair market value of cryptoassets is difficult to determine. Actively traded crypto assets are often traded on multiple trading platforms. For example, Bitcoin can be traded on Binance, Ethereum, Bitfinex and other platforms. Different from the situation where there is only one securities trading market for securities trading, on different trading platforms, Crypto assets vary in price, making it difficult to identify crypto assets through a “fake sale.” the fair value of the asset. In addition, cryptoassets that are not actively traded do not have a fair market value, and therefore, they are not suitable for mark-to-market.

Finally, in an emerging industry, tax policies are often simple and stable to encourage industry development. The crypto industry is an emerging industry that needs encouragement and support. The mark-to-market tax treatment will undoubtedly increase the administrative costs for traders and dealers and is not conducive to the growth of the industry. Therefore, we do not recommend this tax policy.

We recommend that the cost-based method should still be used to tax traders and traders of crypto-assets. This method has the advantages of simple operation and stable policy, and is suitable for the current crypto-asset market. At the same time, we believe that due to the cost basis approach to taxation, there is no need to consider whether cryptoassets are actively traded (under IRC Section 475(e)(2)(A)).

2. Transaction Safe Harbor (IRC Section 864(b)(2))

a) Under what circumstances should the policy behind the trading safe harbor (encouraging foreign investment in U.S. investment assets) apply to digital assets? If these policies should apply to (at least some) digital assets, should the digital assets fall within the scope of IRC Section 864(b)(2)(A) (the trading safe harbor for securities) or IRC Section 864(b)( 2) What is the scope of subparagraph (B) (safe harbor for commodity transactions)? Or, should it depend on the regulatory status of specific digital assets? Why?

b) If a new, separate transaction safe harbor could apply to digital assets, should additional restrictions apply to commodities that qualify for the transaction safe harbor? Why? If the new Should additional restrictions apply to commodities in the Easy Safe Harbor, how are terms such as "organized commodity exchange" and "customarily completed transactions" interpreted among the different types of digital asset exchanges? (In IRC Section 864(b)(2)(B)(iii))

Trading safe harbor rules do not apply to digital assets, but this is not because digital assets should not enjoy tax benefits, but because of the nature of digital assets themselves. One of the important attributes of digital assets is their borderless nature, which means that it is difficult to determine where a large number of digital asset traders belong. Therefore, it is difficult to determine whether a certain digital asset transaction falls under the terms of the transaction safe harbor and is “transacted in the United States.”

We believe that the tax treatment of digital asset transactions can start with the status of a resident taxpayer. If the trader is a US resident taxpayer, he is taxed according to the rules of the resident taxpayer; if the trader is not a U.S. resident taxpayers have no tax issues in the United States and do not need to consider transaction safe harbor rules. This tax treatment avoids the administrative costs of determining the location of transactions, making it simpler and conducive to the development of the crypto industry.

3. Processing of digital asset lending (IRC Section 1058)

a) Please describe the different types of digital asset lending.

b) If IRC Section 1058 explicitly applies to digital assets, will companies that allow customers to lend digital assets develop standard lending agreements to comply with the requirements of that provision? What challenges does complying with this provision pose?

c) Should IRC Section 1058 include all digital assets or only some of them, and why?

d) If a digital asset is lent to a third party and the digital asset undergoes a hard fork, protocol change, or airdrop during the lending period, is it more appropriate for the borrower to recognize revenue in such a transaction, or for the lender to recognize the income in the asset? Is it more appropriate to subsequently recognize revenue upon return? please explain.

e) Are there other transactions like hard forks, protocol changes, or airdrops that might occur during the loan period? If so, please explain whether it is more appropriate for the borrower or lender to recognize revenue in such transactions.

(1) Digital asset lending

The working principle of digital asset lending is that a user takes out his own cryptocurrency and provides it to another user for a fee. The exact way to manage your loan varies from platform to platform. Users can find cryptocurrency lending services on centralized and decentralized platforms, and the core principles of both remain the same. Digital asset lending can be divided into the following types according to its nature:

Collateral loan: It requires the borrower to provide a certain amount of cryptocurrency as collateral in order to obtain a loan against another cryptocurrency or fiat currency. Collateral loans generally need to go through a centralized cryptocurrency trading platform.

Flash loan: It is a new lending method that has emerged in the field of decentralized finance (DeFi). It allows borrowers to borrow a certain amount of cryptocurrency from a smart contract without providing any collateral, and in the same returned in the transaction. "Flash Loan" utilizes smart contract technology, which is "atomic", meaning that the steps of "borrowing-transaction-returning" either all succeed or all fail. If the borrower is unable to return the funds at the end of the transaction, the entire transaction will be reversed and the smart contract will automatically return the funds to the lender, thus ensuring the safety of the funds.

Similar provisions to IRC Section 1058 should apply to all digital assets. The purpose of IRC 1058 is to ensure that taxpayers who make securities loans remain in a similar economic and tax position as they would if they did not make loans. Similar regulations are also needed in digital asset lending to ensure the stability of traders’ financial status. The UK’s latest consultation draft for DeFi states in the “General Principles”: “The staking or lending of liquidity tokens or of other tokens representative of rights in staked or lent tokens will not be seen as a disposal.” This disposal principle is compatible with the disposal principle of IRC 1058.

We can make an analogy to the current IRC 1058(b) to make corresponding regulations on digital asset lending. as long as a certain amount

If a digital asset lending transaction meets the following four conditions, there is no need to recognize income or loss:

① The agreement must stipulate that the transferor will take back exactly the same digital assets as the transferred digital assets when the agreement expires;

② The agreement must require the transferee to pay to the transferor all interest and other income equivalent to the digital asset owner during the agreement period;

③ The agreement cannot reduce the transferor’s risks or profit opportunities in transferring digital assets;

④ The agreement must comply with other requirements prescribed by regulations passed by the Minister of Finance.

It should be noted that applying provisions similar to IRC 1058 to digital assets does not mean that digital assets should be considered securities, nor does it mean that digital assets follow the same tax treatment as securities.

Will work with IRC 1058 After similar regulations apply to digital assets, centralized lending platforms can draw up corresponding lending agreements for traders to use according to the regulations. For decentralized lending platforms, they can adjust the implementation of smart contracts to meet corresponding regulations. Therefore, the application of this provision will not bring significant economic impact.

(2) Recognition of income

If a digital asset undergoes a hard fork, protocol change, or airdrop during the lending period, it is more appropriate for the borrower to recognize the income in such transactions for the following reasons:

First, according to trading habits, the income from forks, protocol changes, and airdrops belong to the borrower, which is in line with the actual situation and contract terms of the digital asset loan market. Generally speaking, the digital asset loan market is a highly competitive and free market. Lenders and borrowers can choose according to their own interests and risk preferences. It’s time to choose the right loan platform and terms. Many digital asset lending platforms will clearly stipulate in their terms of service that any new digital assets generated by any hard fork, protocol change or airdrop during the loan period belong to the borrower . Doing so can avoid disputes and disputes and protect the rights and interests of both parties.

Second, the U.S. tax law stipulates that when taxpayers obtain new digital assets due to hard forks or airdrops, their fair market value needs to be included in taxable income. This means that when borrowers acquire new digital assets as a result of hard forks or airdrops, they need to recognize revenue when they gain control and Gain or loss is recognized upon exchange or exchange. The lender acquires no new digital assets and therefore has no taxable income or gain or loss.

Third, protocol changes may lead to changes in the functions or attributes of digital assets, thereby affecting their value or tradability. For example, protocol changes may increase or decrease digital asset supply, security, privacy, speed, fees, etc. These changes may affect borrowers and lenders differently. In general, borrowers have more control and risk-taking over digital assets during the loan period, They should therefore be entitled to the gains or losses arising from the changes in the agreement. Lenders can only regain control and risk exposure of digital assets when the loan matures, so they should recognize gains or losses based on the value at the time of return.

In summary, if a digital asset is being lent to a third party and the digital asset undergoes a hard fork, protocol change, or airdrop during the lending period, it is more appropriate for the borrower to recognize revenue in such transactions.

4. Offsetting Transactions (IRC Section 1091)

a) Under what circumstances would a taxpayer consider the economic substance provisions (IRC section 7701(o)) to apply to an offset transaction of a digital asset?

b) Are there best practices for reporting digital asset transactions that are economically equivalent to offsetting transactions?

c) Should IRC Section 1091 apply to digital assets? Why?

d) Does IRC Section 1091 apply to assets other than digital assets? If so, to what assets does it apply?

Regarding this group of questions, we believe that IRC 1091 is not applicable to digital assets. Our reasons are as follows: First, the liquidity and diversity of digital assets make corresponding transactions difficult to trace. Unlike stocks or securities, digital assets can be traded on multiple platforms and exist in many varieties and types. this makes It is very difficult for taxpayers to track and record whether they have purchased the same or very similar digital assets within 30 days. In addition, due to price differences and arbitrage opportunities among digital assets, taxpayers may frequently Transferring and exchanging their digital assets between the same platforms also increases the difficulty of enforcing the wash sale rules.

Second, for specific types of digital assets, it is difficult to determine the boundaries of concepts such as “same” or “similar”. For example, digital collectibles (NFTs) are considered unique digital assets. Consider the following situation: after a taxpayer sells an NFT, he then purchases an NFT with a similar name from the market. At this time, the legal definition of whether the two NFTs are recognized as the same or very similar digital assets is ambiguous. Therefore, to avoid such problems, IRC 1091 may not apply to digital assets.

Finally, the exclusion of IRC 1091 from digital assets does not pose serious tax issues. on the one hand, The cryptocurrency market is characterized by rapid value fluctuations and many conversions in a short period of time. As a result, investors are less likely to hold cryptocurrency for the “extremely long term”; on the other hand, the transaction prices of mainstream currencies in the cryptocurrency market It is often the case that "one gain brings both prosperity and one loses both". Therefore, it makes little sense to apply wash sale rules to cryptocurrencies. Cryptocurrencies sold when transaction prices are low will inevitably recognize income and pay taxes when sold at high prices.

The chart below lists the transaction price trends of the top 10 cryptocurrencies by market capitalization on September 4, 2023. It can be found that, with the exception of stablecoins, the transaction price trends of other cryptocurrencies tend to be similar, which means that it is unlikely that investors can infinitely evade taxes through wash sales.

In summary, we believe that the non-applicability of IRC 1091 to digital assets will not cause serious tax problems.

5. Constructive Sale (IRC Section 1259)

a) Under what circumstances would a taxpayer consider the economic substance provision (IRC Section 7701(o)) to apply to constructive sales related to digital assets?

b) Are there best practices for digital asset transactions that are economically equivalent to constructive sales?

c) Should IRC Section 1259 apply to digital assets? Why?

d) Should IRC Section 1259 apply to assets other than digital assets? If yes, for which assets? Why?

Regarding this set of issues, we believe that IRC Section 1259 should not apply to digital assets. The rationale is similar to our rationale for answering the previous set of questions.

First, similar to the previous question, it is still difficult to determine the boundaries of “identical” or “extremely similar” digital assets. For example, in an NFT transaction, an investor holds 1 NFT and sets a short option on this type of NFT. At this time, the implementation of IRC 1259 will face difficulties because it is difficult to confirm whether the NFT in these two transactions is " same".

Likewise, the exclusion of IRC 1259 from digital assets does not pose serious tax issues. The characteristic of the cryptocurrency market is that the transition between the bull market and the bear market is very fast, and the bull market and the bear market will switch several times in a short period of time. Therefore, investors are less likely to hold cryptocurrencies for "extremely long-term". So, Adopt Constructive for Cryptocurrencies The Sales rule doesn't make much sense because its definite transaction time is coming soon.

6. Time and source of income from mining and staking

a) Please describe the various types of rewards offered by mining and staking.

b) How should the rewards and rewards obtained from verification (mining, staking, etc.) be taxed? Why? Should different authentication mechanisms be handled differently ? Why?

c) Should the nature and timing of income from mining and staking be the same? Why?

d) What factors are most important when determining when an individual is involved in the mining industry or mining activities?

e) Which factors are most important in determining when an individual becomes involved in the staking industry or staking activity?

f) Please describe an example of the arrangements for the people involved in the staking pool protocol.

g) Please describe the appropriate treatment of various types of income and rewards earned for others or individuals staking in a pool.

h) What is the correct source of staking rewards? Why?

i) Please provide feedback on the Biden administration’s proposal to impose a sales tax on mining.

(1) Mining rewards and staking rewards

Mining rewards mainly include block rewards and transaction fees.

Block reward: Block reward means that every time a new block is generated, miners will receive a certain amount of newly issued digital assets. The number and rules of block rewards depend on different blockchain networks. For example, the block reward of Bitcoin is halved every four years, from the initial 50 bitcoins to the current 6.25 bitcoins.

Transaction Fees: Transaction fees refer to the fees paid for transactions included in each block and are also distributed to miners. The amount and rules of transaction fees also depend on different blockchain networks. For example, Bitcoin’s transaction fees are set by the transaction sender and vary based on transaction size and network congestion.

Staking rewards refer to the process by which pledgers support the consensus mechanism on the blockchain network and obtain benefits. Basic income: Basic income refers to the digital assets distributed to pledgers in a fixed or floating proportion based on the amount and time of pledge.

Additional income: Additional income refers to digital assets allocated to stakers based on their performance and contributions in the network, such as validating blocks, voting decisions, providing liquidity, etc. The type and amount of additional benefits depend on the different blockchain networks, but can generally be divided into the following categories:

· Dividend income: Dividend income refers to the pledger's participation in certain projects or platforms to obtain a certain percentage of the profits or income generated by them. For example, stakers can get dividends on transaction fees by participating in the decentralized exchange (DEX) on Binance Smart Chain.

· Governance benefits: Governance benefits refer to stakers receiving governance tokens or other rewards issued by them by participating in the governance voting of certain projects or platforms. For example, stakers can obtain ETH 2.0 issued by participating in the verification node of Ethereum.

· Liquidity income: Liquidity income means that pledgers obtain liquidity tokens or other rewards issued by them by providing liquidity of certain projects or platforms. For example, pledgers can obtain their issued DOTs by providing cross-chain asset conversion services (XCMP) on Polkadot.

The nature of the rewards obtained from mining and staking are the same. Both mining and staking obtain corresponding token income through verification on the blockchain. The difference is that mining invests in hardware equipment computing power, while staking invests in virtual currency; but they have the same on-chain verification mechanism. Therefore, the difference between mining and staking is only a formal one. We believe that for entities, the income from mining and staking should be treated as operating income; for individuals, it can be treated as investment income.

Since the rewards for mining and staking are of the same nature, they should recognize revenue at the same time. Income from both mining and staking should be reported and taxed when the taxpayer gains control over the rewarded digital assets. This generally refers to the point at which the taxpayer is free to sell, exchange, use or transfer the rewarded digital assets.

(2) Industry activities

We believe that the question “determining when an individual engages in the mining/staking industry or mining/staking activities” is equivalent to determining whether a person engages in mining/staking as a profession, thereby potentially subjecting him to self-employment tax. Specifically, whether a person is engaged in mining/staking can refer to the following criteria:

Purpose and intention of mining: The individual aims to obtain income or profit, and has ongoing and systematic mining activities.

Scale and frequency of mining: Individuals use large amounts of computing resources and electricity and mine frequently or regularly.

The results and impact of mining: Individuals have obtained considerable income or profits through mining, and have important contributions or influences on the blockchain network.

(3) Pledge Pool Agreement

A pledge pool agreement generally contains the following parts:

Creation and management of pledge pools: Pledge pool protocols are usually created and managed by one or more pledge pool operators (pool operators). They are responsible for running and maintaining pledge nodes, as well as handling the registration, deposit, withdrawal, and distribution of pledge pools. etc. affairs. Staking pool operators typically charge a percentage of fees or commissions as compensation for their services.

Participation and withdrawal from staking pools: Staking pool protocols generally allow anyone to participate in or withdraw from a staking pool with any amount of digital assets, as long as they comply with the rules and requirements of the staking pool. Participants can join the staking pool by sending digital assets to the staking pool’s address or smart contract, and can also exit the staking pool by requesting withdrawal or redemption. Participants typically receive a token that represents their share or interest in the staking pool, such as rETH, BETH, etc.

Income distribution of the pledge pool: The pledge pool protocol usually calculates and distributes the income of the pledge pool regularly or in real time based on the performance of the pledge nodes and the reward mechanism of the network. Revenues typically include newly issued digital assets, transaction fees, dividends, governance tokens, etc. Income is usually distributed according to the participant's share or equity in the staking pool, and is distributed to the participant's address or smart contract after deducting the operator's fees or commissions.

(4) Response to consumption tax

The Biden administration has imposed a 30% consumption tax on the mining industry. We believe that this tax rate is too harsh in a bear market. The comprehensive income of the mining industry in bear and bull markets should be calculated, and a reasonable tax rate level should be determined separately. This tax rate level should not be too much higher than that of cloud services or cloud computing business.

The following table shows the main NASDAQ listed companies in the mining industry in the bear market (2022), bull market

(2021) gross margin. In 2022, the average gross profit margin is 37.92%; but in 2021, the average gross profit margin is 65.42%. Because consumption tax is different from income tax, it is directly levied on mining income, so it will directly affect the company's operating conditions. In a bear market, the 30% consumption tax is a major blow to mining companies.

Another big reason for imposing a consumption tax on the mining industry is that mining consumes a lot of electricity and therefore needs to be punished. However, we believe that the use of electricity in the mining industry does not necessarily cause environmental pollution because it may use clean energy. If all mining companies are charged the same consumption tax, it will not be fair to companies that use clean energy. The government can enable mining companies to meet environmental protection needs through electricity price regulation.

7. Non-Functional Currency (IRC Section 988(e))

a) Should de minimis non-confirmation rules similar to those in IRC Section 988(e) apply to digital assets? Why? What threshold is appropriate and why?

b) If the non-recognition rule applies, does the best available approach prevent taxpayers from evading their tax obligations? What reporting regime will help taxpayers comply?

IRC The de minimis non-confirmation rule in 988(e) should apply to digital assets. Similar to securities investment, digital asset transactions usually involve foreign exchange exchange. Therefore, if every digital asset transaction requires verification of foreign exchange losses, it will bring a huge administrative burden. We believe that the limits set forth in IRC 988(e) are appropriate.

The application of micro-uncertainty regulations in digital assets may cause taxpayers to evade tax obligations. In this regard, we recommend referring to relevant national tax laws. It is not necessary to verify foreign exchange losses when voluntarily declaring each transaction, but at the end of the tax year, random checks are made to verify Whether the foreign exchange losses of some transactions have been truthfully declared. if transaction Those who fail to truthfully declare foreign exchange losses will face corresponding penalties. This system design will help taxpayers comply with tax filing regulations.

8. FATCA and FBAR reports (IRC Sections 6038D, 1471-1474, 6050I, and 31 USCSection 5311 et seq.)

a) When do taxpayers report digital assets or digital asset transactions on FATCA forms (eg, Form 8938), FBAR FinCEN Form 114, and/or Form 8300? If the taxpayer reports certain categories and not others, please explain and account for the categories of digital assets that are and are not reported on these forms.

b) Should the reporting requirements for FATCA, FBAR and/or Form 8300 be clarified to remove ambiguity as to whether they apply to all or some classes of digital assets? Why?

c) Given the policies behind FBAR and FATCA, should digital assets be more included in these reporting regimes? Are there barriers to doing so? What kind of obstacle?

d) How do stakeholders consider wallet custody when determining compliance with FATCA, FBAR and Form 8300 requirements? Please provide examples of wallet custody arrangements and indicate which types of arrangements should or should not be subject to the reporting requirements of FATCA, FBAR and/or Form 8300.

(1) Response to declaration rules

Overall, we recommend designing a new form for declaring all digital assets. This will help the development of the digital asset industry, as declaring digital assets in the current form is slightly cumbersome and may inhibit trading activity.

However, if you need to declare within the existing form, we recommend the following ways to declare:

For FATCA forms (such as Form 8938), taxpayers should report any form of digital assets they hold or control abroad, regardless of whether they are linked to the U.S. dollar or other legal tender. This includes, but is not limited to, cryptocurrencies, stablecoins, tokenized assets, non-fungible tokens (NFTs), decentralized finance (DeFi) protocols, etc. Taxpayers should convert their overseas digital assets into U.S. dollars based on the year-end exchange rate and determine whether they need to fill in Form 8938 based on the reporting threshold.

For FBAR FinCEN Form 114, taxpayers should report their offshore custodial or non-custodial digital asset wallets that could be considered financial accounts if the total value of those accounts exceeds $10,000 at any time. Taxpayers should convert their overseas digital assets into U.S. dollars according to the year-end exchange rate, and Relevant account information is available on 114.

For Form 8300, taxpayers should report cash or cash equivalents, including cryptocurrency, in excess of $10,000 that they receive from the same buyer or agent. Taxpayers should convert the cryptocurrency they receive into U.S. dollars based on the exchange rate on the day of the transaction and provide the relevant transaction information on Form 8300.

(2) Response to wallet custody

Regarding the issue of wallet custody, our views are as follows:

A cryptocurrency wallet is a tool used to store and manage digital assets, and it can be divided into custodial wallets and non-custodial wallets. Here are the definitions and differences between these two wallets:

A custodial wallet refers to entrusting encryption keys to a third-party service provider, such as an exchange, bank, or professional digital asset custodian, who is responsible for storage and management.

A non-custodial wallet means that you control your own encryption keys, such as using software wallets, hardware wallets, or paper wallets.

We believe that regardless of the wallet used, taxpayers should report their digital asset holdings in Form 8938 or Form 8300 under the current system. However, in order for taxpayers to use FBAR To report digital assets in FinCEN Form 114, it is necessary to clarify whether a cryptocurrency wallet constitutes a foreign financial account. We believe that custodial wallets provided by overseas service providers can be recognized as overseas financial accounts; non-custodial wallets require further discussion.

On the one hand, some non-custodial wallets may not be considered offshore financial accounts because they do not involve third-party participation or control. For example, if a hardware wallet or paper wallet is used, and the user has complete control over their private keys and digital assets, then the user may not need to report these wallets on the FBAR form because they are only personal property and not offshore financial accounts.

On the other hand, some non-custodial wallets may be considered offshore financial accounts because they involve third-party services or functions. For example, if a software wallet is used and the wallet can be connected to an overseas exchange or platform, or provides some cross-border transfer or exchange functions, they can be regarded as overseas financial accounts.

However, whether it is a custodial wallet or a non-custodial wallet, as long as the wallet is associated with an overseas financial account, such as cross-border transfers or exchanges through the wallet, then the wallet may need to be reported on the FBAR form because it Involving overseas financial accounts.

9. Valuation and Certification (IRC Section 170)

a) Digital assets currently do not meet the IRC Section 170(f)(11) exception for assets with readily available valuations on exchanges. Should attestation rules be modified to take into account digital assets? If so, in what way, and for which types of digital assets? More specifically, do different measures need to be taken for those digital assets that are publicly traded?

b) What characteristics should exchanges and digital assets possess in order for this exception to appropriately apply, and why?

We believe that the relevant provisions of IRC 170 should be amended to include digital asset donations. but Yes, tax-deductible digital assets are limited to common, publicly traded digital assets, not all digital assets. Digital assets such as NFTs that are difficult to obtain a fair market value should not be subject to the exception of IRC 170(f)(11), because their transactions may be artificially controlled. Moreover, digital assets such as NFT that are difficult to obtain fair value are more difficult to liquidate and obtain funds, which will increase additional costs for donors. Policies should encourage donors to donate easily liquidated cryptocurrencies.

Specifically, we believe that donations of digital assets whose fair market value can be determined in accordance with the spirit of Notice 2014-21 and related documents can be subject to the exceptions of IRC 170(f)(11), such as: “on at least one platform with real currency or other virtual currencies that have a published price index or value data source".