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House Crypto Tax Hearing Highlights Partisan Divide, Industry Urges Expansion

A House hearing on six cryptocurrency tax bills on Tuesday revealed a significant lack of bipartisan consensus, with industry leaders advocating for broader legislation while Democrats expressed reservations about the pace of the process.

Behind the scenes, the looming prospect of Democrats regaining control of the House in November’s midterm elections is a key factor. Republicans, seeking to advance their crypto agenda while they hold power in Congress and the White House, are pushing for swift passage of these bills. Democrats, conversely, are beginning to frame crypto legislation as an important but not necessarily immediate priority.

“There is a sense of urgency, but there’s also a sense of, ‘are we acting too quick without knowing what we’re doing?’” Representative John Larson (D-CT) stated during the House Ways & Means Committee’s hearing. “There’s far more questions than there seem to be answers.”

The committee’s top Democrat, Representative Richard Neal (D-MA), indicated to reporters that a bipartisan agreement on crypto tax policy is unlikely before the midterm elections, according to Punchbowl News. “I’m aligned with that goal—eventually,” Neal remarked at the hearing regarding his interest in passing bipartisan crypto tax legislation.

A central point of contention between the parties emerged Tuesday concerning the tax treatment of cryptocurrency rewards generated through staking and mining. One of the six Republican-authored bills proposes exempting such rewards from an individual’s taxable income. Currently, staking rewards and newly mined crypto are considered income at the time of receipt, irrespective of whether they are subsequently sold or converted to fiat currency.

Democrats, including those generally supportive of the crypto industry, voiced concerns that deferring taxes on these rewards could make digital assets more appealing than traditional investments like stocks and bonds, potentially leading to significant shifts in financial markets.

“It seems to be a real sticking point in all this, and it seems that maybe we’re at an impasse,” Representative Mike Thompson (D-CA) commented on the tax policy surrounding crypto staking and mining. Thompson has previously voted in favor of both the stablecoin-focused GENIUS Act and the more comprehensive Clarity Act, which aims to formally legalize most cryptocurrency activities in the United States.

Meanwhile, cryptocurrency executives who testified urged lawmakers to broaden certain provisions within the proposed legislation, particularly regarding de minimis exemptions for crypto payments. As currently drafted, one bill would establish a $10 de minimis tax exemption for crypto network transaction fees, commonly known as gas fees. It would also eliminate reporting requirements for stablecoin transactions, treating dollar-pegged tokens as equivalent to U.S. dollars for tax purposes.

Lawrence Zlatkin, Coinbase’s vice president of tax, advocated for extending the de minimis exemption to encompass all digital assets. “A consumer who uses Bitcoin to buy a pair of jeans still has to calculate and report a capital gain,” Zlatkin argued. “That’s not good tax policy. Americans shouldn’t need an accountant to buy jeans.”

With the Clarity Act facing a tight deadline in the Senate as the November midterms approach, crypto policy advocates had hoped that progress on crypto taxes could serve as a consolation prize if a broader market structure bill fails to pass before year’s end.

Stablecoin Rule Needs Refinement, Policy Center and VC Firm Argue

The Hyperliquid Policy Center (HPC) and venture capital firm Paradigm have jointly submitted comments to the U.S. Treasury, calling for revisions to a proposed stablecoin compliance rule linked to the GENIUS Act. The rule aims to establish anti-money laundering (AML) and sanctions requirements for “permitted payment stablecoin issuers” (PPSIs), a category intended to foster innovation in payment stablecoins while managing illicit finance risks.

Narrower Compliance, Less Burden

While not opposing the framework’s overarching goals, Paradigm and HPC contend that critical aspects of the proposal require clearer definitions. They are particularly concerned that compliance obligations could inadvertently extend beyond the scope and intent of the GENIUS Act.

A central point of contention is how PPSI duties should apply in the secondary market, where issuers lack direct relationships with counterparties. The firms argue that while Congress intended for PPSIs to conduct due diligence on their direct customers, it did not intend to mandate additional diligence for secondary market trading.

Drawing an analogy to traditional banking, Paradigm and HPC stated that regulated institutions, after performing Know Your Customer (KYC) checks upon fund entry, are not expected to monitor every subsequent transaction after cash withdrawal. Similarly, they believe that decentralized peer-to-peer stablecoin transfers, and other digital assets, should primarily require KYC at regulated on-ramps and off-ramps, with compliance efforts focused where direct relationships exist.

The organizations warned that an alternative approach could compel PPSIs to file a high volume of low-value suspicious activity reports (SARs). This, they cautioned, would generate “noisy” reports with false positives, increasing costs for both PPSIs and the Financial Crimes Enforcement Network (FinCEN) without clear public benefit.

Hyperliquid Policy Center Urges Clarification

The submitted comments also address the proposed rule’s definition and assignment of obligations related to “lawful orders.” Paradigm and HPC noted that the proposal defines “lawful order” by referencing the GENIUS Act’s definition of “person,” which in turn dictates who might be required to develop technological capabilities.

They argued that the current draft could be interpreted too broadly, potentially encompassing developers of distributed ledger protocols, decentralized self-custodial interfaces, and other technologies that Congress explicitly excluded from the GENIUS Act’s definition of a “digital asset service provider.”

The firms asserted that this outcome would contradict congressional intent and recommended a clarification in the final rule to explicitly exempt certain entities and technologies from lawful order requirements.

Failing to provide such clarity, according to Paradigm and HPC, could unintentionally impose lawful order obligations on every validator on networks like Ethereum, Hyperliquid, Solana, and various Layer 2 systems that process transactions involving PPSI-issued stablecoins. They predicted that this could lead to U.S. validator stakes moving offshore, the relocation of U.S. blockbuilding operations, and a decline in the U.S. share of the validator base, undermining both the GENIUS Act’s onshoring objectives and broader U.S. interests.