Senator Lummis Proposes Crypto Tax Reforms as IRS Faces Watchdog Criticism

Senator Cynthia Lummis has introduced a new bill to reform crypto taxation, coinciding with a federal watchdog report criticizing the IRS.

crypto tax

Senator Cynthia Lummis has unveiled a new legislative proposal aimed at updating the United States’ tax framework for digital assets, following the exclusion of crypto provisions from the latest federal budget. The move comes as a separate report from the US Treasury Inspector General highlights procedural failures within the IRS Criminal Investigation division regarding the seizure and custody of cryptocurrencies—further underscoring the need for clearer, more consistent federal policies on digital assets.

Cynthia Lummis

Senator Cynthia Lummis Introduces Groundbreaking Crypto Tax Reform Bill Amid Frustrations Over Budget Bill Omissions

US Senator Cynthia Lummis of Wyoming has unveiled a sweeping new draft bill aimed at modernizing the country’s outdated tax framework to accommodate digital assets, after lawmakers once again failed to include crypto-related provisions in the latest federal spending package. The standalone bill proposes a series of reforms long sought by digital asset investors, including a de minimis exemption for small transactions and tax deferrals on mining and staking rewards.

The draft legislation, introduced Thursday, seeks to alleviate the mounting tax burden on everyday crypto users and blockchain innovators by carving out specific exemptions for common crypto-related activities. Among the bill’s headline proposals is a de minimis capital gains exemption of $300 per transaction, with a $5,000 annual limit, allowing users to make everyday purchases with crypto without triggering tax reporting obligations.

In a statement accompanying the release, Senator Lummis said the bill was “groundbreaking” and designed to bring common sense and clarity to how digital asset activity is taxed in the United States.

“This groundbreaking legislation is fully paid for, cuts through the bureaucratic red tape, and establishes common-sense rules that reflect how digital technologies function in the real world,” said Lummis. “We cannot allow our archaic tax policies to stifle American innovation. My legislation ensures Americans can participate in the digital economy without inadvertent tax violations.”

Beyond the small transaction exemptions, the bill also proposes deferring taxes on mining and staking rewards until the earned digital assets are sold — a move that addresses long-standing complaints that the current tax code unfairly penalizes miners and proof-of-stake validators by treating newly minted tokens as immediate income.

Lummis' bill would also exempt crypto lending agreements and digital assets donated to charity from taxation, aligning them more closely with traditional asset treatment. Currently, many crypto users risk facing tax obligations even when using or donating their assets in good faith — a disincentive that critics say hinders broader adoption and philanthropic use of blockchain-based wealth.

A Solo Shot After Budget Disappointment

The proposal represents Senator Lummis’ latest attempt to deliver on promises made to the cryptocurrency community after crypto-specific tax provisions were left out of the most recent Congressional budget negotiations. Despite bipartisan support for modernizing crypto regulations, the final budget bill moved forward without language addressing the treatment of digital assets.

Without a legislative vehicle attached to broader government funding, Lummis’ standalone draft bill now becomes the most realistic path forward for immediate pro-crypto tax reform — but it faces an uphill battle in a deeply divided Senate.

Still, industry advocates are applauding the move as a bold step in the right direction.

The US crypto community has grown increasingly frustrated over what they describe as “double taxation” and inconsistent treatment of digital assets across jurisdictions and use cases.

One of the most contentious issues revolves around decentralized finance (DeFi) protocols, which operate autonomously and without custodians. Under current interpretations of IRS guidance, users interacting with such protocols could be subject to the same reporting requirements as centralized platforms, despite the lack of a centralized counterparty. This has led to confusion and compliance challenges for retail and institutional users alike.

Adding to the complexity, crypto earnings from staking, liquidity provision, or protocol participation can be taxed as income upon receipt, even if the user has not sold or realized any actual profit. In highly volatile markets, this tax timing can result in significant financial losses.

DeFi Developers May See Regulatory Relief

In a related development, members of the House Financial Services Committee recently proposed an amendment to the Digital Asset Market Clarity Act of 2025, aiming to exempt developers of decentralized protocols from being classified as money transmitters. This exemption would shield them from burdensome tax reporting rules that currently apply to centralized exchanges.

If passed in conjunction with Lummis’ tax bill, the pair of reforms could mark a turning point in how the US treats decentralized platforms, potentially positioning the country as a friendlier jurisdiction for Web3 innovation.

Meanwhile, Congressional leaders are scrambling to find a way to incorporate crypto provisions into the final version of the budget bill before it lands on President Donald Trump’s desk. With rising global competition — and more welcoming regulatory frameworks in the EU, UAE, and Hong Kong — pressure is building on US lawmakers to catch up.

The crypto industry remains cautiously optimistic. While previous efforts have stalled or been watered down, Senator Lummis’ persistence, combined with growing bipartisan support for digital asset clarity, may finally move the needle.

Outlook: A Defining Moment for US Crypto Policy?

As the digital asset industry matures, calls for reasonable tax reform and regulatory clarity have grown louder — and more politically urgent. With trillions of dollars in value already flowing through blockchain networks and millions of Americans now holding crypto, the need for a modern tax framework has never been more acute.

Senator Lummis’ bill represents a significant step forward, even if it faces procedural hurdles. At a time when innovation is global, many see her proposal as a chance for the US to retain its competitive edge in the digital economy.

IRS

US Watchdog Criticizes IRS Over Mishandling of Seized Crypto Assets, Calls for Urgent Reforms

In related news, a new report from the US Treasury Inspector General for Tax Administration (TIGTA) has revealed major shortcomings in how the Internal Revenue Service Criminal Investigation division (IRS-CI) manages the seizure and custody of digital assets, adding fuel to growing concerns over the federal government’s ability to securely and transparently handle crypto enforcement cases.

The watchdog’s report, published Tuesday, highlights repeated failures by IRS-CI personnel to comply with established protocols for handling confiscated cryptocurrencies between December 2023 and January 2025. The findings raise red flags at a time when the federal government holds one of the largest cryptocurrency stockpiles in the world — estimated at over 200,000 Bitcoin, or more than $21 billion at current market prices.

Missing Records and Lax Oversight

According to TIGTA’s audit, IRS-CI agents failed to complete or update required seizure memorandums, which are meant to document key details of confiscated digital assets, including wallet addresses, transaction dates, and amounts. The absence of such documentation has left gaps in the official record and raised questions about transparency and accountability.

The watchdog emphasized that this failure was not isolated to a single incident but represented a pattern of negligence over a 14-month period.

TIGTA's evaluation identified several critical recommendations to fix the deficiencies — all of which were agreed to by IRS-CI leadership. These include:

  • Ensuring IRS-CI personnel understand and adhere to seizure memorandum requirements.

  • Establishing a robust inventory management system to accurately track seized digital assets by quantity, address, and type.

  • Updating internal guidelines to include time frame requirements for preparing seizure memos and for timely updating the inventory system.

These reforms, if implemented effectively, could mark a significant shift in how the federal government manages one of the most sensitive and valuable categories of criminally seized assets: cryptocurrency.

The report comes at a pivotal moment in US crypto policy. Under President Donald Trump’s renewed term, the administration has revived discussions around establishing a national Bitcoin reserve using digital assets confiscated in criminal cases.

While White House officials have floated the idea of converting these holdings into strategic digital reserves, others have proposed alternative acquisition methods, including imposing crypto tariffs or revaluing gold certificates. Regardless of the acquisition method, safe custody of digital assets is a prerequisite for such plans — making the IRS’ missteps particularly alarming.

The Scale of Government Crypto Holdings

Public interest in the government’s crypto holdings has surged as the value of Bitcoin and other digital assets continues to climb. Based on available data from major criminal seizures, the US government is believed to control approximately 200,000 BTC, although the exact amount may fluctuate with ongoing investigations and asset liquidations.

Among the most notable cases:

  • 94,000 BTC from the 2016 Bitfinex hack, seized in 2022.

  • 50,000 BTC tied to the Silk Road darknet marketplace, recovered in separate operations.

  • Other significant seizures from ransomware groups, darknet markets, and fraud schemes.

While some of these holdings have been auctioned off in the past, the majority of high-profile Bitcoin seizures in recent years remain under government custody — a responsibility that now appears to be fraught with internal weaknesses.