Senator Lummis Introduces Digital Asset Tax Reform Bill

Senator Cynthia Lummis (R-WY) has introduced a standalone digital asset tax reform bill that could significantly alter how digital and traditional financial assets are treated under the Internal Revenue Code (IRC). The bill, introduced on July 3, 2025, aims to address the outdated and inconsistent tax frameworks that have made compliance burdensome and risky for various stakeholders in the digital asset industry.

The bill includes several key reforms. Firstly, it amends Section 7701 of the IRC to introduce a formal definition of “digital asset.” This definition clarifies that a digital asset is a “digital representation of value which is recorded on a cryptographically secured distributed ledger,” excluding traditional financial assets and real-world property. This definitional clarification is expected to reduce ambiguity in compliance frameworks and provide industry-wide clarity.

Another significant provision is the expansion of Section 1058 to cover “specified assets,” which includes both traditional securities and actively traded digital assets. This change aims to address the disincentive for capital formation and liquidity in tokenized markets by ensuring that lending arrangements involving qualifying digital assets do not trigger a taxable event at the moment of transfer, provided certain conditions are met.

The bill also revises Section 1091 to apply the 30-day wash sale rule to digital assets, bringing them into alignment with the treatment of securities. This change closes a known tax-loss harvesting strategy used by some crypto investors while maintaining appropriate exceptions for legitimate business activities.

Additionally, the legislation creates a new Section 475(g), allowing traders and dealers in specified digital assets to elect mark-to-market treatment. This provision 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. This shift aims to bring consistency to how digital asset income is reported and allow firms to claim losses more accurately in volatile markets.

The bill also proposes reforms in areas such as staking, mining, and charitable contributions. Income from staking and mining activities would not be recognized until the taxpayer disposes of the assets received, aligning recognition with economic realization. Donors of “actively traded digital assets” would no longer need to obtain a qualified appraisal, aligning treatment with donations of publicly traded securities. The legislation also clarifies international tax treatment for distributed infrastructure providers by sourcing income from validation activities based on the taxpayer’s residence.

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 reflect an attempt to balance innovation and integrity within a modernized tax framework.

Each major provision in the bill features a sunset date of December 31, 2035, suggesting that lawmakers view the proposed reforms as transitional measures. This temporal limitation could introduce long-term planning uncertainty and regulatory risk, underscoring 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. 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.