Federal Fiscal Year 2025 Budget Impact on Digital Assets

Each year, the President and the Office of Management and Budget (OMB) submit a budget proposal to Congress to review, amend, and pass appropriation bills to fund government operations for the upcoming fiscal year. The administration has attempted to regulate and update digital asset laws through these budget proposals for the last few years. If Congress approves the federal fiscal year 2025 budget proposal, it will likely have an impact on anyone dealing with digital assets. 

Wash sale rule

A key component of the proposal seeks to end digital assets' current “loophole” when applying the wash sale rule. If you sell securities for a loss and purchase the same security within 30 days (before or after), the loss is not deductible immediately. Since this rule does not apply to digital assets, many investors utilize this opportunity to harvest losses, offset other capital gains, reset their position, and optimize taxes more aggressively. If passed, investors must be more diligent when trading digital assets for a loss and repurchasing them. If they don’t plan accordingly, the loss could be disallowed. 

This proposal will be the most significant revenue driver in the digital asset space. Imposing the wash sale rule on digital asset sales is estimated to generate $9.8 billion in tax revenue from 2025 to 2029 and $25.8 billion from 2025 to 2034.

30% mining excise tax

For the second year, the administration is trying to impose an energy excise tax on digital asset mining. The proposal is that any firm using computing resources, whether owned by the firm or leased from others, to mine digital assets would be subject to an excise tax equal to 30% (phased in over three years) of the costs of electricity used in digital asset mining, adding administrative burdens to mining companies. These companies will need to complete an excise tax form and report the type and amount of electricity they use. Many, like Senator Lummis, think this proposal would hurt the mining industry in America. 

The government expects to generate $2.4 billion from 2025 to 2029 and $7.7 billion from 2025 to 2034 from the excise tax. This tax targets the energy-intensive process of cryptocurrency mining, aiming to generate revenue and address environmental concerns associated with energy consumption in the sector.

Mark-to-market rules

The proposal also includes amending the mark-to-market rules to include digital assets, requiring certain traders to report the value of their digital asset holdings annually. Basically, if trading digital assets is your full-time job and you regularly carry out a substantial amount of trading throughout the year, you could qualify as a trader. Many investors do not meet the criteria to be a “Trader”, but being a trader enables you to make an election that bypasses the default limit on capital loss deduction ($3,000 maximum a year).

This election could benefit qualified traders in the long term by providing a clearer reflection of income and possibly reducing the tax compliance burden. The administration believes that digital asset traders (not to be confused with investors) have unrealized gains, which means any digital asset trader who makes this election must realize all their unrealized gains (in addition to unrealized losses). 

They anticipate this will generate $7.8 billion from 2025 to 2029 ($8 billion in the first year) and $7.3 billion from 2025 to 2034. As you can see, the revenue decreases, so this is a one-time revenue generator for the government.

We have discussed the mark-to-market rules if you want to learn more. 

Foreign accounts

Taxpayers holding foreign financial assets over $50,000 must file a Form 8938 and include it with their tax return. Failure to provide the required information for a taxable year is subject to a penalty of between $10,000 and $60,000 for each failure. The administration has tried to address this in past budgets because it is unclear if digital assets must be reported on Form 8938. The proposal suggests amending the law to include reporting requirements for digital assets held in foreign exchanges or service providers.

They are concerned that taxpayers are using offshore exchanges and not reporting the income earned. U.S. citizens are already required to report all their income regardless of where it is earned. So, this doesn’t change how taxpayers calculate their income. Certain taxpayers will have an additional filing requirement, adding more complexity to their returns. 

Through this proposal, the administration anticipates generating $2.3 billion from 2025 to 2029 and $5.5 billion from 2025 to 2034.

Broker reporting

Lastly, the proposal aims to enhance information reporting by certain financial institutions and digital asset brokers to facilitate the exchange of information with foreign jurisdictions. The Foreign Account Tax Compliance Act (FATCA) mandates foreign financial institutions to report comprehensive data about U.S. accounts. At the same time, U.S. brokers are required to report certain customer information to the IRS. With the rise of digital asset transactions, there's a need to extend reporting requirements to cover digital assets held by foreign persons and passive entities, including substantial foreign owners. This proposal would compel financial institutions to report account balances, gross proceeds from digital asset sales, and information on passive entities and their foreign owners. Reciprocally sharing information aims to bolster global efforts against tax evasion using digital assets.

They anticipate that information sharing and reporting will generate $1.5 billion from 2025 to 2029 and $3.5 billion in revenue from 2025 to 2034.

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Disclaimer: This post is informational only and is not intended as tax advice. For tax advice, please consult a tax professional.