Patrick Camuso, CPA01:11.79Absolutely. I’m looking forward to picking up where we left off here. So let’s get into it. Digital assets to a certain degree have revived a lot of long standing tax concerns around timing, character, and basis, and the potential for abuse around some of these items. And in some of your writings, which I encourage everyone to check out on askramerlaw.com, you’ve written that crypto accelerates existing forms of abuse rather than inventing new ones. And I agree with you on that. So, you know, as policymakers are looking at anti-abuse rules like constructive sales, like watch sales straddle, straddle provisions among other items in whether or not they should extend the digital assets. Which of those frameworks do you see as most critical for preserving overall market integrity?

Andie Kramer02:10.154Well, they’re all important, but I think that ultimately the key is that we need guidance from the government and we need it from Congress because at present, because the law is in some places ambiguous and in other places, although it’s not ambiguous, people don’t understand or know what the rules are. Then what it does is it allows people to cherry pick and to pick and choose the tax treatment that they think is best for them in that situation. And so Congress is the one that really needs to specify the tax treatment of, for example, staking so that it’s clear. The law is clear, but it’s not clear to taxpayers. It’s not clear to their advisors. And so it’s really not good enough for the IRS or the Treasury to come out with notices or pronouncements that don’t have the real weight of any significant ability to rely on them. And so what we do need is we need Congress to say something. And I think that, as I’ve said previously, the reality is that the rules open up the Internal Revenue Code, and there you have it. You can follow along with it. And I think that that’s really what we need to worry about for purposes of market integrity. We just need to be sure that there’s some clear guidance for taxpayers.

Patrick Camuso, CPA03:54.794Absolutely, I agree with you. And like you said, where things aren’t perfectly clear as they apply to digital assets, it can start to create divergence in tax treatment across practitioners and taxpayers. And, you know, I see this a lot in my practice in different contexts with types of digital asset transactions. In one area where, you know, I’ve also seen you focus on a bit. is related to mark to market accounting for digital assets. And you know, that’s becoming increasingly important for both compliance and market structure. The question of whether or not digital assets fall into market market, mark to market treatment, and whether they, you know, fit as an actively traded commodity or as a security. And to a large degree, when they’re falling into that commodity bucket, it hinges on whether or not they qualify as actively traded. So can you maybe give your perspective on that a bit and then get into why that ambiguity around that eligibility can become concerning from a tax administration and compliance?

Andie Kramer05:04.68Okay, I think that’s really a great question, Patrick. And the reason why is that what we have at present is we have most digital assets are going to fall into the commodity bucket, and some of them will fall into the security bucket. But securities defined for tax purposes are really shares of a corporation. or debt securities sometimes can be included as well. Very narrow so that most digital assets don’t fall into that bucket. But they do fall into the bucket of a commodity. so what we have for purposes of the Mark to Market rule is it talks about actively traded commodities, actively traded. And What does that mean? Well, what we know is that we have, you know, three or four different types of digital assets that are now trading on CFTC regulated commodity exchanges, which gets them into 1256 treatment. And as 1256 contracts, they’re actively traded. But what about everybody else? What about all of these other contracts, these other digital assets that are actively traded, but not on a commodities exchange? And so we have situations where people are trying to guess as to what they should be treating as mark to market. What would fall into the 475 mark to market rules? And so we just don’t know what else would be there. And so it would be easy enough for clarification, defining what is meant by actively traded, what is meant by a commodity. And I think that that is ultimately the key, again, for clarifying. I would think that people might err on the side of

Andie Kramer07:32.099being more inclusive. And so under those circumstances, how would you evaluate that? Well, is it it actively traded on a crypto exchange? Well, it doesn’t have to be a commodities exchange. It ought to be qualifying as well. And so, you know, there are techniques and ways that people could come up with a framework on their own and stick with that framework. And I would think that on audit, if the framework is reasonable and it makes sense and people are consistently following it, that they ought to be allowed to have made some decisions on their own since we don’t have guidance from the government.

Patrick Camuso, CPA08:22.506Exactly. And that’s where, you know, the challenge comes in right now for taxpayers and practitioners. And that’s where you start to see that that divergence. But yeah, overall, I agree with you there. Now, you know, another area of anti abuse that is, you know, been discussed for years and is, you know, high area of focus overall, I would say. is wash sales and know wash sales currently apply to securities they don’t apply to digital assets and you know i’ve heard many times people refer to that as a loophole i’d like to hear your opinion if you if you think that’s a loophole to a certain degree and you know overall what is your perspective on whether or not wash sales should apply to digital assets and you know how can this take into consideration the overall nature of digital assets in the crypto market in general. And so yeah, can you give your perspective on that?

Andie Kramer09:51.381unless Congress decides to change the definition of what’s in the wash sale rules. Now, there are a lot of actively traded commodities that are not in the wash sale rules. So putting digital assets in is just a way of distinguishing a digital asset from the universe of other sorts of commodities. Now, I’m not saying that that’s necessarily bad. It’s just that it is it would need to be a conscious decision. And so. Why would somebody want to put digital assets into the wash sale rules? Well, because they are, people do buy in and out of them and the market is so volatile that you could have a situation where you have a loss today and then again tomorrow. So people could, under the rules that applied before the wash sale rules applied to security, say, aha. I can take a loss today and then reacquire my digital asset and have a tax loss, but I don’t have an economic loss. And so that’s really the argument for why digital assets should be considered as going into the wash sale rules. The problem with that is that the wash sale rules apply for transactions 30 days before and 30 days after the transaction itself. So we’re talking about a 61 day time period. And if we just watch the value of digital assets in 61 day period, we’re talking about gyrations that are staggering. And so are we…

Andie Kramer12:27.934a couple of good questions there. In the proposal so far that have said, yes, digital assets should be subject to the war sale rules, I have not seen anybody suggesting that the period be less than 61 days. And part of it, I think, is because I think that A key reason why making digital assets subject to the wash sale rules has gained so much popularity is because the industry supporters like it because they need something to throw under the bus for them to support the staking arguments or the de minimis arguments. And so if you want to say that staking income is not income when you receive the reward, then you’re deferring a tax, deferring it forever. Same thing with the de minimis rules that are being proposed. And so I think that war sales became a poster child for arguing, well, you know, we’re not only asking us you to give, give, give to us, but we’re also proposing to give something, you know, back. And so I think that’s been part of the dynamic as and that may be why nobody’s been talking about changing the 61 days to something that would be more appropriate or more meaningful for digital assets.

Patrick Camuso, CPA14:21.25Yeah, I agree with you. A lot of these tax considerations get outside of just the technical tax considerations and get into policy trade-offs that, you know, there has to be trade-offs. And you’re right that wash sales has been one of the, from my perspective in the conversations we’ve seen so far, one of the bigger concessions from the industry as a whole. And, you know, there is there are taxpayers that definitely are doing transactions that lack economic substance when it comes to digital assets and you know taking advantage of the fact that watch sales don’t apply but I agree with you that that you know that 60 day 61 day period is you know just a lifetime like you said for digital assets and what is your perspective on just you know taxpayers doing these transactions where maybe watch sales don’t apply but economic substance considerations do apply and they’re doing transactions where there is no economic substance. That’s another way to approach it, but much harder to enforce, obviously.

Patrick Camuso, CPA16:00.0And especially in a market like crypto that’s so fast moving again too. So yeah, I agree with you. So it’s gonna be interesting to see where that goes from a policy perspective on watch sales. Another interesting area that I think a lot of the statutory language struggles to map to digital assets are the safe harbors for foreign investors, which were really designed to make sure that foreign investors don’t have US exposure with their trading activity. But as you’ve outlined, a lot of the concepts like commodities traded on an organized exchange or consummated in a particular place, those concepts are to match to a decentralized environment. So how do you think this safe harbor should evolve or should it evolve? to start to provide more certainty to foreign investors that are participating in these markets.

Andie Kramer17:07.042Okay, well, that’s another one that we could talk about for three, four hours, but I’ll try to give you the, again, give you the high points and then you can drill down as you want. The commodity safe harbor. Now, let me step back for a second. Why do foreign people care about this? They care about this because they don’t wanna be in a U.S. trader business. They don’t wanna find themselves subject to U.S. tax. Now, The reason that the industry cares about it is because they’re allowed to have US investment managers if they qualify for the safe harbor. And so there’s an incentive for US people to want this to work for the foreign investors because there’s opportunities for them to get more business. Okay, so that’s sort of the… the groundwork that we start with. The commodity safe harbor, for reasons which are totally inexplicable to me, I have no understanding why. There must have been a magic intention at some point. But the language, as you suggested, is talking about a commodity and it’s of a kind customarily dealt in. on an organized commodity exchange and the transaction is customarily consummated at such a place. Well, that has no relevance to the digital asset world. I mean, it doesn’t really have relevance to the commodities world. At one point, maybe you were You know, you had everything was done on the board of trade or the mercantile exchange or the the cotton exchange or the whatever exchange But now commodities in general are actively traded outside of being customarily dealt in on an organized exchange and so I get this question all the time from clients who are saying

Andie Kramer19:29.684this particular instrument doesn’t trade on an exchange, but it’s darn similar to something else that does. so do I get sort of the glow of just because X is traded on the exchange that Y ought to be getting the same treatment because it’s a similar product? And so there’s a lot of money at stake and there’s a lot of issues that come up being wrong. And so, you know, what can Congress do about it? Well, I think that from a legislative standpoint, they could either say something like, we’re going to actively traded digital assets. We still have the question of what do mean by actively traded? And so hopefully they would be giving us some guidance on that. They could say that the definition of a commodity aligns with what the CFTC’s definition. of a commodity is because the CFTC definition is basically all goods, articles, services, rights and interests.

Andie Kramer20:37.836I mean, that’s the kitchen sink, that’s everything. Interestingly, the way that the commodity statute is defined in the Commodities Exchange Act is that it’s everything, including the kitchen sink, except for onions and movie interests. And so, you know, we could talk about how that happened, but the reality is that If you’re an onion trader, you’re not going to be able to, miraculously, your onions aren’t a commodity. But for all of the rest of us, everything else is pretty much a commodity. And so you don’t have to have physical delivery. It could be an index. It could be any number of things. And so I would think that those are really the two ways that Congress could easily solve the problem. by trying to provide some definition. And I would think that the definition for a commodity at present is archaic and doesn’t fit for commodities either. So it would be a perfect opportunity for Congress to update the definition, the language of who qualifies for purposes of the trading safe harbor.

Patrick Camuso, CPA22:08.638It appears we need a more modern definition. that would be great to see. And then this carries into staking and validator participation as well in the potential that foreign investors can cross into US trader business exposure there as well, which kind of brings us full circle to when we were discussing wash sales and staking and global competitiveness. So. Can you give a bit of an analysis around that and what are the tax risks and the overall policy perspective on that as well?

Andie Kramer22:43.35Well, if we look at staking generally, you’ve got a node and you’re staking. Well, it’s very hard to say that you’re not really in an active business. There are arguments that you aren’t, and I’m not suggesting that everybody’s in a trader business, that’s on the spectrum. more likely to be a trader business. If you take your stake and you give it to somebody else and they pool it and they trade it, then in that situation, it’s a lot harder to say that it is a trader business that anybody would have to worry about. And in fact, they did come out with some guidance with respect to trust staking because they wanted to make it clear that they didn’t want to have them in a business, know, an unrelated business taxable income or any of that stuff. And so we have a little precedent, if you will, for viewing pooling as not being, you know, as not being an active trader business. And so I think that in foreign investors, that’s the easy way is to let somebody else do it for you. But the drawback there is that then you’ve given up the control and the management of something that could be very important to your economic results.

Patrick Camuso, CPA24:37.814Yeah, yeah, it’s interesting what you say about the president’s precedence related to, know, how the staking is treated in the trust. I never thought of it from that perspective, but I agree with you on that. So that’s an interesting point you raise there. And yeah, these points were trying to attract foreign investors. I think there’s a much better outlook of, you know, some guidance being given there than maybe on the watch sale side, because this kind of goes more towards the U.S. global. Would you agree with that?

Andie Kramer25:09.044Yes, and that is one thing that we know from the president’s working group report. There’s a big incentive wanting to encourage foreign investment. Now, we could talk about whether this really encourages foreign investment or not, because most of the activity that you read about is US investment managers who are setting up foreign funds to capture those investors that aren’t taxable US investors, whether it’s the not-for-profits, the tax exempts, or the foreign. Are we really getting foreign investors? Well, maybe we really don’t get a hell of a lot.

Patrick Camuso, CPA26:27.438Absolutely. Now, you one theme throughout this conversation is that all the rules are there and can be applied to digital assets, but you know some of the definitions like you said need to be bought up to modern times. We need a monetization of some of these definitions like related to commodities and other definitions. But another challenge with digital asset markets in general is that transaction design, custody structures, protocol level mechanics continue to evolve. You know, it’s not something that’s static even today. You know, we’re going to likely see this evolve over the next, over the coming years. So how do you take that into consideration when you’re thinking about designing tax policy and you know, how should it be drafted to remain durable when the underlying market itself evolves and it evolves so quickly as well.

Andie Kramer27:30.316Well, one of the things about digital assets is that that’s not the first new asset class that the Internal Revenue Code has had to deal with. And so we have situations where asset classes are developed all the time. And what does that mean and how do they fit? And so I’m an open up your Internal Revenue Code and start reading kind of a of a person who thinks that that’s where you start. You look at the code and you look at what the rules are and you either by analogy or by direct fit, things get shoehorned in. And so I think that from a tax policy standpoint, it’s not necessary to create a whole new regime for digital assets. And what I would worry about is that if we’re so busy creating that regime, we’re probably going to then be creating all sorts of unintended consequences as to how it works and what’s going on. And it would also then be designed for the snapshot of whatever the day is that they’re making these decisions. so, know, Eureka! It could very well be out of sync or out of design in no time at all. And so for me, think that there are places where we would want to nibble around the edges. There’s places where we would want to consider having Congress making some legislative changes. But as a practical matter, I don’t think that we ought to be scrapping the Internal Revenue Code and starting from scratch because it’s a new asset class.

Andie Kramer33:24.148Well, I think that everything really does revolve around tax character, tax timing and source. so as complicated as the digital asset and the derivatives tax world really is, and it’s pretty complicated, primarily because most of the rules are anti abuse rules. So that what happens is Congress finally says we don’t you know, we don’t like this, we don’t want you to be able to do this. And so we’re going to stop you from doing it. And so then they create a rule, which is, you know, thou shalt not do such and such. But well, wait a minute, what about all those people who are legitimately in those markets? And so then they do an exception, an election and identification some way that the good guys can get out of the bad rule. And so that’s how the piecemeal digital asset, the derivatives world has been structured. But everything really does boil down to character, timing, and source. And so I think that the core principles, those are the core principles. And I think that as whether it’s this wave of financial products or the next wave or the wave after that, that we need to be true to those three points. We spend much more time on character and timing than we do on source, but source is a very important issue too and gets sort of the secondhand treatment because it only applies when you’re dealing with either a foreign person or transactions are offshore. And in the digital asset area, bingo, lots of transactions are offshore. So that’s an area where I think that some more attention could be paid because I think that there’s a gap there.

Patrick Camuso, CPA35:36.93Yeah, there’s definitely a gap there. I agree with you on that. you know, there is the next wave of financial products that are coming with perpetuals, prediction markets, you know, other derivatives built on digital assets. I’ll put that as an aside because you kind of alluded to that. It’s outside of the scope of this conversation, but maybe we’ll do another conversation on that because that’s a whole nother dedicated episode right there. And I know you’ve been publishing on that and it’s very hot topic that will continue to be for some time, I believe. So we’ll have to sort of pick up that discussion in the future. But this conversation’s been great, Andie. You have a wealth of information and I want everyone to know, you know, most of the things that we discussed here, you’ve covered in detail in your writings and they can be found on your blog among other places. So can you maybe let people know like where’s the best place to… read some of your writings and get in contact with you if they want to explore this more.

Andie Kramer36:38.114Well, I think the best place is my website, is ascramerlaw.com. And if you click on the resources or some such buzzword like that is where my articles are. They’re also published in JD Supra or the National Law Review. so… There are ways to find them that way by Googling, I would think. But the easiest thing to do is just to reach out. And I’m happy to talk to people about these issues. Obviously, it’s something that I love to talk about. they can reach me. There’s a client service link to reach out. And so please feel free to… Give me a call, tell me if you think I’m saying something stupid or you don’t agree with me. That works too. So I’d love to hear from all of you.

Patrick Camuso, CPA37:45.358Absolutely, so I encourage everyone to check out the website. There’s tons of great information on there and you can reach out to Andie directly there if you want to discuss the topic with her or work with her directly through her firm. So Andie, thank you again for being a guest. really appreciate it. To everyone that’s been watching here, I hope you took some value from this conversation. Comment below if you have a specific question or an area that you do want to discuss more and we can, can, you know, comment and have the conversation there as well. Andie, thanks again for being a guest until next time. I’m Patrick Camusa signing off.