Lummis Crypto Tax Reform Bill Could Transform U.S. Digital Asset Rules

Forbes

09-07-2025

WASHINGTON - SEPTEMBER 21: Sen. Cynthia Lummis, R-Wyo. (Bill Clark/CQ-Roll Call, Inc via Getty ... More Images)
The U.S. digital asset industry has been operating under a tax code that wasn't built for the blockchain era. A lack of clear definitions, inconsistent treatment, and outdated frameworks has made compliance not just burdensome—but risky. And not just for retail investors, but for institutions, developers, and even regulators trying to keep up.
Case in point: the way digital assets are taxed compared to securities and commodities. Stepping into this regulatory gap is Senator Cynthia Lummis (R-WY), a longtime Bitcoin advocate and one of the most consistent crypto-focused voices on Capitol Hill.
On July 3, 2025, Lummis introduced a standalone digital asset tax reform bill that, if enacted, could mark a pivotal moment in harmonizing how digital and traditional financial assets are treated under the Internal Revenue Code (IRC). Her proposal follows the removal of similar provisions from the broader 'One Big Beautiful Bill Act' during the House amendment process, a result that prompted Lummis to reintroduce them independently to preserve momentum behind digital asset tax clarity.
'We cannot allow our archaic tax policies to stifle American innovation,' said Lummis in a press release. 'My legislation ensures Americans can participate in the digital economy without inadvertent tax violations.'
The bill outlines several key reforms aimed at modernizing tax treatment for digital assets. Here is a closer look at its major provisions and what they could mean for legal, financial, and compliance professionals navigating this evolving policy landscape.
A Statutory Definition for Digital Assets
Section 1 of the bill amends Section 7701 of the IRC to introduce a formal definition of 'digital asset.' Under the proposal, a digital asset is defined as a 'digital representation of value which is recorded on a cryptographically secured distributed ledger,' with carve-outs for representations of traditional financial assets and real-world property.
This definitional clarification addresses a long-standing challenge across regulatory bodies: multiple federal agencies currently operate with differing classifications of digital assets. Establishing a consistent statutory definition offers a shared foundational reference point across regulatory domains and could reduce ambiguity in compliance frameworks moving forward as well as industry-wide clarity.
Tax Treatment of Digital Asset Lending
The legislation expands Section 1058 to cover 'specified assets,' a new term that includes both traditional securities and actively traded digital assets. As a result, lending arrangements involving qualifying digital assets would no longer trigger a taxable event at the moment of transfer, provided that certain conditions are met.
This change seeks to address a long-standing disincentive for capital formation and liquidity in tokenized markets. Under current rules, lending crypto (even temporarily) can trigger immediate—often onerous—tax consequences, even when no economic benefit has been realized.
Accordingly, the proposed update aims to remove barriers that, as explained by Lummis, have 'discouraged legitimate lending markets and created artificial barriers to capital efficiency.'
Wash Sale Rule Extension for Digital Assets
A separate provision revises Section 1091 to apply the 30-day wash sale rule to digital assets. While this change would close a known tax-loss harvesting strategy used by some crypto investors, it brings digital assets into alignment with long-standing treatment of securities.
Notably, the bill includes exceptions for dealers and for transactions involving payment stablecoins, which are defined elsewhere in the bill. This signals a targeted application of tax parity principles while accounting for practical differences in asset function. Lummis's bill would ensure tax neutrality between asset classes while maintaining appropriate exceptions for legitimate business activities.
Mark-to-Market Accounting for Traders and Dealers
The bill also creates a new Section 475(g), allowing traders and dealers in specified digital assets to elect mark-to-market treatment. This election would allow taxpayers to recognize gains and losses based on fair market value at year-end, similar to rules already available to securities and commodities traders.
For high-frequency trading firms, hedge funds, and crypto-native trading platforms, the bill's mark-to-market provision could significantly reshape how gains and losses are recognized for tax purposes. If adopted, digital asset dealers and traders would be allowed to treat holdings as if they were sold at fair market value at year-end, which would mirror the treatment already available to securities and commodities traders. This shift would bring long-overdue consistency to how digital asset income is reported and allow firms to claim losses more accurately in volatile markets.
Adjustments for Mining, Staking, and Charitable Contributions
The legislation proposes additional reforms in areas that have generated ongoing uncertainty:
Each of these provisions reflects attempts to align digital asset taxation with functional and operational realities in the Web3 ecosystem.
Administrative Oversight and Anti-Abuse Provisions
The bill includes several regulatory safeguards, authorizing the Treasury Secretary to issue guidance on wallet segregation, mixed-transaction treatment, basis adjustments, and broker reporting. It also anticipates the need for anti-abuse rules to prevent manipulation of the new exclusions or accounting elections.
These provisions suggest that while the bill aims to simplify and clarify, it does not forgo regulatory rigor. Instead, it reflects an attempt to balance innovation and integrity within a modernized tax framework.
Temporary Reforms with a Built-In Sunset
Each major provision in the bill, including those related to lending, staking, wash sales, and de minimis exemptions, features a sunset date ten year of December 31, 2035. This temporal limitation suggests that lawmakers view the proposed reforms as transitional measures, subject to revision as markets, technology and regulatory experience evolve and results inform future lawmaking.
For businesses and tax professionals, however, the sunset clause could introduce long-term planning uncertainty and regulatory risk. This underscores the importance of continued stakeholder engagement during the rulemaking and review process.
While the Lummis proposal is still in its early stages and its passage is far from certain, it represents a notable effort to modernize digital asset taxation by aligning it with long-standing rules in the traditional financial sector. Taken together, the provisions signal a broader shift in how lawmakers are approaching digital asset regulation to prioritize clarity, neutrality, and administrative feasibility.
For legal, financial, and compliance professionals, this bill provides an important window into the direction of U.S. tax policy. As digital assets become more integrated into capital markets and everyday commerce, the ability to interpret and navigate these evolving rules will remain a key strategic competency.