Episode 4: Digital Assets & Stablecoin Update

In this week’s Tackling Tax, we’ll delve into digital assets and stablecoin.

Episode Transcript

(00:00):
On this episode, we'll look into digital assets,
and more specifically, stablecoin.
We welcome Nik Fahrer, the leader
of our firm's Digital Assets practice,
and Bobby Bean, a regulatory managing director in our
Consulting practice. From your one stop
for tax updates and analysis.
I'm Iris. And
I'm Devin.

(00:21):
It's Tuesday, June 24th, and this is Tackling Tax.

(00:42):
Well, Devin, there's a lot going on.
We are just a few weeks away from that July 4th target date
that Congress has publicized for the tax bill,
but most people I've talked
with at least have questioned
whether that's feasible or not.
Yeah, for sure. But let's also not forget about the
July 9th date for those higher reciprocal tariff rates
that are gonna kick back in for a lot of countries.

(01:05):
15 days for those tariffs,
but you know, who's counting, right?
And with that, let's get
to our Fast 4 stories of the week.
The Senate Finance Committee issued texts last week
for their version of the One Big Beautiful Bill Act.
And given the amount of text in the bill,

(01:26):
we're actually splitting the topic out
between our first two stories.
So, first, we're focusing on tax cuts,
and then second, we'll cover revenue raisers.
So where's the Senate spending their money?
The Senate made domestic RNE Immediate Expensing permanent.
Remember, this is only temporary in the House version.
Also new, the Senate bill will allow those

(01:47):
that have previously capitalized their domestic RNE expenses
to amortize the remainder of the balance.
If you're a small taxpayer,
they also included the ability
to amend previous tax returns for this as well.
In the world of TCJA changes,
the Senate bill would also make the Section 199 a qualified
business income deduction, or QBI, permanent.

(02:09):
That's the benefit, of course, that owners of flow-
through entities can receive.
And unlike the House bill, which increased the rate to 23%,
the Senate bill kept it at the current rate of 20%.
Shifting to President Trump's campaign proposals,
there were still deductions
that addressed no tax on tips over time or Social security,

(02:31):
but at different amounts in the House Bill.
We also saw a slew of individual taxpayer changes,
including, for example,
making the increased standard deduction permanent.
On the international side,
while the House bill really only addresses international tax
topics by changing rates for GILTI, FDII,
and BEAT, the Senate bill adjusted those rates to 14%,

(02:53):
and then also introduced quite a few other provisions
affecting international companies.
Well, Iris, that certainly sounds like a lot.
So obviously the next question's gonna be,
how are they gonna pay for it?
And that brings us to our second story,
revenue raisers and the bill.
Now, some of the items included in the House version did not
make it into the Senate version; most notably,

(03:15):
was the increased threshold
for classifying manufacturing businesses as small taxpayers.
Now, as a side note, although not a revenue raiser,
the Senate bill also did not include the trade provisions
that were in the House bill, such
as the House bill's permanent removal
of the $800 de minimis exception,
and other changes for duty drawbacks.
One difference that most people expect to be contentious is

(03:37):
around the SALT cap.
After a lot of debate, the house had settled on a $40,000
max cap with phase downs implemented.
The Senate version, however,
made the cap permanent at the $10,000 level.
Also, instead of limiting the related pass-
through entity workarounds for specified trades
or businesses like the House did,

(03:57):
the Senate changed the pass-through entity limitation
for owners of pass through entity interests.
Now, at least quantity-wise, most of the differences
between the two versions
of the bill came from the Clean Energy
Provisions. High level?
The Senate bill changed effective dates for most
of the provisions and did not include the
repeal of transferability.

(04:18):
It did maintain considerations for foreign entities
of concern, but it also implemented some thresholds
and ratios that would be a little bit more
forgiving in this area.
New to the bill, it proposed the termination
of the Section 179 D energy efficient
commercial buildings deduction.
But possibly the most impactful are the changes

(04:38):
to the production tax credit
and the investment tax credit.
Those are the credits for things like solar and wind.
So instead of the 60-day beginning
of construction requirement in the House Bill,
the Senate phased out these credits starting in 2026,
ending the credits by 2028. Changes

(04:58):
to the domestic content bonus credit
and the certain leases for solar and wind are also included.
So overall, the revenue raises from the Senate side are
generally less severe than they are on the House side.
Right. But doesn't the house still
have to agree to the changes?
Like, yes, the Senate has changed it,
but the House has to sign off as well, right?

(05:21):
That's right. And especially that SALT difference.
So that's where most people are going to expect pushback.
Well, and, too, just in reading the bill,
the Senate bill is proposing a lot of things as permanent,
which I thought was still up in the air on the Senate side
based on whether the parliamentarian says current policy

(05:42):
baseline is acceptable or not.
Has she talked about,
I know she started rulings on Byrd Rule,
but has she talked about whether she's
gonna allow permanency?
Not yet. So we'll see if
permanence stays in the bill or not.
All right. Right. Well, thanks Devin.
So I guess more to come on the bill front
as this gets voted on and progress through the process.

(06:04):
But now for our third story, we're pivoting to the topic
of trade and tariffs.
Taking us back a little bit as a refresher on
what President Trump dubbed Liberation Day,
he implemented reciprocal tariffs at various rates
on multiple countries.
Then he had paused until July 9th,
then a court case decided Trump could not

(06:25):
actually impose these tariffs at all,
but then a May 29th stay made it so
that the tariffs could be temporarily in place.
Now, the Federal Circuit of Appeals has issued an extension
of the stay, meaning the case will likely be
heard by the end of the summer.
What does that mean for companies
that are importers of record?
So that means

(06:45):
that they should still operate under the executive order
that Trump had out,
but they should also keep an eye on
the appeals decision.
So it could be that the importers
of record could get a refund if they nullify the tariffs
this summer, but, you know, we'll see what happens.
All right. So what about the customers of vendors,
like the people that may have experienced higher prices

(07:05):
passed on from importers?
Yeah, I mean, that's a great question.
I think, unfortunately,
they wouldn't necessarily be able to reap those benefits
because the refunds would be to the importers themselves
who are responsible for paying the tariff.
Yeah, that's pretty tough.
But did I see that there may have been a trade deal
struck with the UK recently?

(07:27):
Yep. President Trump issued an Executive Order
implementing the agreements with the UK on May 8th.
So generally, there's a few
different areas that this touched.
It wasn't just sort of a blanket deal,
but it addressed vehicles, aerospace, pharmaceuticals, steel,
and aluminum imports mostly.
The UK has also agreed to lower tariffs on U.S. beef

(07:48):
and allow for the duty-free importation of ethanol.
Interesting. A lot happening on the tariff front.
Well, moving on to the fourth story
and in theme with our guest for the next segment,
we would be remiss if we did not mention some digital
asset related news.
So the Senate passed the Genius Act targeted at

(08:09):
oversight of stable coins.
The ACT had strong bipartisan support passing 68 to 30.
However, it still has
to pass the House We've seen in news media
that they expect the House consideration
to take some time despite Trump's goal of passage by August.
Note that this legislation is the first of what could be
many more regulations over digital currency,

(08:31):
and that could spur some large credit card companies
and other retail companies to consider
entry into crypto, you know, due to perceived comfort
that the regulations might provide.
So, we'll let our guests in the next segment really get into
those specific facts of the bill,
but please note that our interview
with Nick was recorded prior to the passage
of the Genius Act,

(08:51):
so some of the comments might reflect that timing.
Perfect. Well, thanks, Devin.
What a great transition to our next segment.
Planning Insights.
This segment is called Planning Insights,
where we examine tax strategies
and often their risks that you might not have thought of.

(09:13):
Today's Insights is something that I have
to admit I know very little about,
so I'm very excited for this one.
We're talking about stablecoin. Let me introduce our guests.
Nik is a director and the leader of the blockchain
and Digital Assets practice here at Forvis Mazars.
He's a CPA living
and working in Colorado Springs with nearly a decade

(09:33):
of experience with the firm.
We affectionately here at the firm, call him Crypto Nik,
and you can find him that way on LinkedIn.
Bobby Bean is a former senior regulator
and is the head of Forvis Mazars
new U.S. Financial Services Regulatory Center.
He sits in Charlotte, North Carolina,
and has had 35 years of experience in this space.

(09:55):
Nik, Bobby, welcome to Tackling Tax.
We're very excited to have you both.
Now, Iris and I were talking a bit
before this episode about what's going on in the crypto
world, and it sounds like there's two key pieces
of legislation with one maybe more, directly related
to tax, and another one being more broad
to cryptocurrency in general.
Now, Nik, Bobby, admittedly, when it comes

(10:18):
to crypto, Iris
and I really can't hold a candle to either of you.
So for our benefit, it would be helpful if you could maybe
provide us with like the 101 basics a bit
before getting too technical.
So Nik, I would like to start with you
in talking about the Infrastructure Investment in Jobs Act,
or I think the IIJA as it may be called,

(10:39):
or at least commonly referred to. This is an infrastructure
bill or legislation.
How does cryptocurrency tie into that?
Yeah, great question. And, Devin, maybe
before I dive into answer that question directly,
I wanna take a step back,
and I think some listeners that might be listening to this

(11:00):
may hear the word cryptocurrency
or crypto and roll their eyes.
You know, maybe they believe that crypto is only used
for criminal activity or nefarious activity,
or maybe they believe that it's only used for speculation.
And I want to first say that I was at a conference
recently where one of the panelists spoke up

(11:21):
and said that if you're a CFO or a finance leader right now,
and you're not at least researching
or piloting the use of stablecoins,
you're behind your peers.
And, you know, I know this is a tax focus podcast,
and I'll answer your question here in a minute,
but I want to give listeners a sneak peek into
what we're gonna be discussing here for a lot of this.

(11:43):
And that's stablecoins.
So, so stablecoins, what are they?
They're typically tokens on a blockchain
that represent at least a one-to-one backing of cash
and cash equivalents.
They also typically allow holders
to redeem their tokens one-to-one for cash.

(12:03):
And so stablecoins generally benefit from the underlying
technology of blockchain
and typically provide cheaper, faster,
and more transparent money transmission.
So, for example, Tether is the largest stablecoin issuer.
They recently moved over $1.4 billion of crypto

(12:25):
for $2 and 2 cents.
So you can kind of see, you know, compare
the volume of the money that was moved versus the cost.
So if you're a finance leader and you make payments
or even accept payments, which is most businesses, right,
chances are stablecoins could be a way for you
to potentially reduce costs, maybe even reduce foreign

(12:48):
currency translation exposure and approved settlement times.
And so a very common example
that we're seeing is paying foreign
contractors in stablecoins.
And, you know, contractors may also even like this
because the USD stablecoin that they're receiving,
because it's tied to U.S. dollars,

(13:10):
may be stronger than their local currency.
So that's a little bit about stablecoins,
their use cases and whatnot.
But, Devin, to answer your question, so
the IIJA is actually going back several years, was
first passed in November
of 2021 under the Biden administration,
and as you mentioned,

(13:31):
this is an infrastructure-focused bill.
So how does crypto come into play?
Well, the bill, the way that it was partially funded,
was by requiring brokers to issue 1099s,
or information reporting for crypto transactions.
Basically,
before this bill was passed, brokers didn't have

(13:53):
to issue those 1099s that you would normally see
come through at the end of the year in January or February
that summarizes your trading activity
that you then use to help you file your tax return.
Okay. So has there been any change
or movement since this was, you know,

(14:13):
enacted back in November of 2021?
Any recent guidance we need to be aware of?
Yeah, so it actually took almost three years
for the IRS to publish, the IRS
and Treasury to publish final regulations, around these.
So July of 2024,
they published custodial broker regs,

(14:35):
which basically laid the pathway for brokers
that are custodying these assets to comply
with these new regs issue tax information reports.
And that becomes effective
for transactions beginning on January 1st, 2025.
So if you, transacting crypto starting on January 1st, 2025,
you could expect to start to receive 1099s in January,

(14:59):
February of 2026 to help you file your 2025 tax return.
Treasury and IRS also released
noncustodial broker regs in December of 2024.
And these were going to be effective
for transactions beginning on January 1st, 2027.
However, those noncustodial broker regs were later repealed

(15:22):
in April of this year under the CRA.
So basically what that means is
only custodial brokers will have
to report these transactions on 1099s.
Well, what's an example of a custodial broker?
Yeah, so, you know, generally speaking,
you could think about your Coin Bases, your Krakens,

(15:43):
your Geminis of the world, those centralized exchanges
that are really custodying assets on behalf of customers.
And then you also have traditional players like PayPal
nowadays that offer integrations
with crypto. Robinhood is another one
that now also offers the ability
to trade crypto within their platform.
So those may be some examples of brokers

(16:04):
that you could start to see
or expect these 1099s to come from.
So it's gonna look a lot like your stocks,
is that what you're telling me?
Like, you know, your general 1099s
that you get at the end of the year,
it's gonna be a similar functionality.
Is that right?
You're right, it'll be similar.
It won't be exactly the same.
Actually, the IRS released a very, very new,

(16:26):
brand new 1099 form called the 1099 DA that stands
for digital assets that's specific
for these types of transactions.
So it'll be similar.
It won't be exactly the same,
but yes, you're right on. Well,
how did they get it before then?
Like how is this information,
I mean, I'm assuming you still had
to report it on your return and all of that,
but were the people just tracking it

(16:47):
themselves, or how did that work?
Yeah, exactly. And
that's the reason why this was part of
that Infrastructure Investment in Jobs Act, is
because it was estimated that there was a 90% non-compliance
with reporting crypto transactions.
And so, you know, one of the ways the Treasury
and IRS cracks down on non-compliance is
through information reporting requirements

(17:08):
because if the custodial broker is issuing a 1099
to the customer, and they're also issuing a copy of that
to the IRS and maybe even the state, that's how the IRS
and states can crack down on underreporting.
So, you know, taxpayers are really on their own to try
and figure out how to calculate their cost basis

(17:28):
and proceeds and ultimately their gains and losses.
There's software out there
that can help automate some of these processes.
And some taxpayers were going about it that way,
but yeah, I mean, largely they were on their own.
And another misconception is, you know,
receiving a 1099 is the trigger to file
this activity on your tax return.

(17:50):
That's not the trigger. As we all know,
the trigger is the realization of it in itself.
And so I think that's why there was such
non-compliance is
because there's that misconception
that receiving the 1099 is actually
what triggers the reporting requirement.
And so they made these massive regs, right?
I think, I think you sent me the link

(18:11):
and it was like 300 pages or something crazy, right?
Like, I certainly don't have time to read through that.
I know you have, but can you give us the highlights then,
like, so no one on this podcast has to deal with that?
Yeah, absolutely. It's very light reading if,
you know, you're needing
some help falling asleep at night.
Mm-hmm. So, yeah, I mean, generally speaking,

(18:34):
if you're a custodial broker, meaning you're taking
control over the asset on behalf of your customer
and you're effectuating trades on their behalf,
so maybe you're trading Bitcoin to dollars
as an example. That would be a covered transaction
where they would need to report that on a 1099.

(18:57):
Now cost basis reporting isn't required
until 2026 transactions and going forward.
So this first year is just gonna be
gross proceeds on these 1099s, which makes it
even more important for taxpayers
to continue to have good records. I was
about to say, yeah,
'cause otherwise, how would they
actually report their gains, huh?

(19:18):
Exactly right.
Uh, if you receive a 1099 that, let's say it has $50,000
of gross proceeds on it and a blank cost basis, you know,
unless you're a taxpayer, that's just really nice to the IRS
and likes overpaying.
Yeah. You're gonna want to make sure
that you have good records so
that you can incorporate the cost basis into
your tax returns as well.

(19:40):
And then another important piece is that even
beyond 2026, when cost basis reporting is required,
it's only required if the digital asset stays within
all four walls of the custodial broker at all times.
One thing that is unique about digital assets is that,
let's say I buy Ethereum, as an example,

(20:02):
through Coinbase, I can send that somewhere else.
I can send that to my own self-custodial wallet.
I could send it to another broker,
but if it leaves Coinbase's is four walls, they no longer have
to report the cost basis on that, even if I send it back
to their platform to eventually liquidate it.
So it has to stay within all four walls.

(20:23):
And there's other nuances to this.
There's even di minimis exceptions that are in place
where, for example, we're talking about stablecoins
here today, if it's a qualifying stablecoin
and the total transaction volume
for the entire year is under $10,000,
those brokers also don't have to report that on this 1099.

(20:47):
So, that piece is really important
because $10,000 when we're talking about stablecoins
is actually a pretty low threshold,
especially if you're using these to make payments.
So one thing that folks
who are transacting digital assets can expect,
especially if it's stablecoins, is

(21:09):
to receive these 1099s at
the end of the calendar year.
Or if you're a broker
and you're issuing a stablecoin,
perhaps maybe you have a new tax information
reporting requirement
that wasn't on your radar to begin with.
It's all very interesting.
In interest of time, I do want

(21:31):
to talk about stablecoins,
and I think they're related to that second piece
of legislation, the Genius Bill.
Bobby, I know Nik gave us some background on
what stablecoins are, but could you maybe kind
of extrapolate on that
and, you know, to add, you know, are they risky?
What's regulation look like here?
Sure. Absolutely, you know, in the Senate

(21:52):
that there's a, there's a bill going forward.
It's called the Genius Act. In the House.
there's a contemporaneous bill called the Stable Act.
Both of them, hopefully, at some point
we will come together.
But these bills are designed to create
what they call a payment stablecoin.

(22:13):
So think of stablecoin there in this context
as digital cash, so to speak.
So essentially what a payment stablecoin has the potential
to do is to replace a check or a debit card transaction
or, you know, any type of payment of cash.

(22:34):
So to do that it is important that there is a strong framework
that will allow payment stablecoins
to fit into the current regulatory framework.
So the bills would allow a bank,
a subsidiary of a bank, a non-bank issuer

(22:56):
that meets certain standards to be able
to issue payment stablecoins that could be
sent
and received kind of in lieu of cash payments.
So if you think about a bank
and your bank account today,
when you make a deposit in your bank, the bank takes part

(23:17):
of the money
and holds in securities
that they can liquidate if you want your money back.
The other part's made in law; we call
that fractional banking.
The bills actually go a step further than this
to eliminate fractionalization.
That is to say that when you put money into

(23:39):
a bank subsidiary
or other entity to purchase a stablecoin, those funds
actually have to be placed completely
in high quality liquid assets; no loans can be made.
So these bills would essentially require
a stablecoin issuer to hold all of the cash that you make

(24:01):
that you provide them for purchase of a stablecoin
in treasuries, bank deposits,
and other very high quality liquid assets.
So, you know, in theory,
it's gonna be a lot safer than actually
a bank account provided that, you know, prudent rules

(24:21):
and regulations are put in place.
I was gonna say, did I see some
movement on this in the Senate?
Do you know, did it pass in the Senate?
No, it hasn't passed in the Senate,
at least as of the time we're recording this,
in the Senate, it passed the filibuster test.

(24:44):
So it has progressed along
to a potential vote.
So no filibuster can stop the vote.
However, there are some potential amendments
that could be made that to the stablecoin bill that
has nothing to do with stablecoins.

(25:05):
Durbin
and Marshall are asking for an amendment that would
change the way Visa
and MasterCard and other credit card providers,
that would limit their control
over their, what they call a monopoly over the credit

(25:25):
card world.
So at this point, if those amendments are attached
to the Genius Act as it moves forward,
it's uncertain whether
or not our ultimate passage would occur.
I think, you know, Devin asked you about the risk profile.

(25:46):
You're basically saying
that this really controls risk really well just based on
how these bills are written.
Could you talk a little bit more about the framework
that's involved with the risk there?
I think there's different buckets.
Nik was trying to prepare me a little bit,
and admittedly I'm not entirely sure what he was saying.

(26:06):
So can you go through that framework for risk there?
Oh, absolutely. Similar to a bank
or other financial institution, a stablecoin issuer
would have to hold an appropriate amount of capital
that is not just simply a dollar for dollar reserve,

(26:26):
but would have to hold additional reserves in the form
of capital, would have to hold additional reserves
to account for interest rate risk.
As you've seen lately, you know,
the interest rates as they move, they can change the value
of underlying securities quite profoundly.
So they would have to hold additional reserves

(26:50):
to protect against those movements,
but also to protect kind of the safety
of the financial system,
they would have to, to ensure that
they followed Bank Secrecy Act,
anti-money laundering,
and sanction compliance rules as well.

(27:11):
And I think one thing that kind
of sends the whole thing to another level
of protection is there's also requirements
that when banks hold these,
or when entities hold these funds
in reserves, they can't be commingled
with any other assets.

(27:32):
They have to be held in custody specifically for
the stablecoin.
So it can't be reused, rehypothecated,
or co-mingled with different funds.
So there's gonna be a very strong governance requirement
and a requirement that on a periodic basis,

(27:54):
an auditor like Forvis Mazars, I'll give ourselves a plug,
that an auditor will come in
and look at the reserves to ensure
that there is appropriate accountability of the reserves,
that an appropriate amount of reserves are held
and that they are appropriately liquid.

(28:15):
You know, so I'm kind
of curious from the business side.
Is this potentially going
to affect business strategic plans?
If you're a banking entity,
let's start with a bank.
If you are a bank,
this means you got direct competition against deposits.
So,

(28:36):
if you are an individual looking at looking at whether
to place your money
in a traditional bank where you write checks,
send wire transfers
or ACH transfers, you may say, you know, I am
as well protected in the stablecoin space

(29:00):
because I have a real-time payment.
I can move money instantaneously,
and as Nik said, I can move it out of the country
so I don't have to worry about the fees with money
transmitters, et cetera.
So that is a, you know,
from a banking side, they need to look at the replacement

(29:21):
of deposits. From a non-banking side, let's say
for example, a small business.
Mm-hmm. If a small business decides
to receive stablecoin versus let's say a credit card,
the fees associated with sending
and receiving a stablecoin is a lot cheaper

(29:42):
than the fees associated with other forms of payment.
So it may be—and you get the money immediately, right?
If I write you a check
and you're a bank, you may not get the funds for three
to five days after you're deposited.
If I send you a stablecoin,
you got those funds immediately.
So it is much more cost efficient.
Nik, Bobby, thank you both so much for being here today.

(30:06):
This really is an exciting topic, and
because it's evolving as much as it is,
I anticipate we'll probably be seeing you on here
again at some point in the future.
Now, I just want to mirror Devin's thanks
and say we hope you'll come back
and stay tuned
for more about a Focus FORsight of the Week.

(30:29):
Thank you again to Nik and Bobby for being our guests today.
So with that, each episode we'll bring you
what we call a Focus FORsight of the Week, an article
or recording that might be of interest to you.
This week's Focus FORsight is called "Key Considerations
for Protecting Crypto Assets."
In this article, we discuss the risk of loss from fraud

(30:50):
or asset misappropriation
and how controls when it comes
to cryptocurrency could make all the difference.
You can always access our FORsights on the WNTO website
or the Forvis Mazars US website more broadly.
And that's our show.
Thank you so much for joining us.
Remember to subscribe and listen in for the next episode
because it's gonna be a good one.

(31:11):
You got it. We have the chief economist from the
Forvis Mazars Group here next week.
So we are really excited
to hear his thoughts on the implications
of the tax bill globally.
Until next time.