Walking and Falling at the Same Time: New U.S. Tax Court Decision Elevates Need for Cryptocurrency Tax Bill

The Paschall Decision
In 2021, the taxpayers held Cardano tokens, a form of cryptocurrency, in a digital wallet at eToro. eToro served as a validator on the Cardano blockchain and earned Cardano tokens for recording transactions in the tokens. eToro, in connection with its validator activities, allowed its customers to provide tokens that eToro, as a validator, was required to pledge to the blockchain. If a customer did not opt out of the service, it received either 75% or 90% of the tokens awarded to eToro for the pledge. The Cardano tokens could be converted into cash at will but could not be transferred to another digital wallet. The taxpayers did not opt out and received Cardano tokens with a value of $33,354 in 2021. The court should have stopped here. The taxpayers leased their tokens to their wallet provider and received rent for the use of the tokens. Rent is taxable, full stop.^[3]

Instead of finding the rent was taxable, the Tax Court treated the taxpayers as though they acted as validators. And given the fact that the compensation for the use of the tokens was so obviously taxable, contorted the law to find that proof-of-stake rewards should be immediately taxable. The Tax Court employed a three-part analysis to hold that the taxpayers received taxable income when “validator rewards” were transferred to their digital wallet by eToro. First, citing Glenshaw Glass,^[4] the court held the fact that the taxpayers could reduce the Cardano tokens to cash at any time was evidence that they possessed dominion and control over the tokens. Under this test, a cash basis taxpayer is subject to tax on income that they can exercise dominion and control over regardless of whether they choose to do so. (This was clearly true—the rent was taxable income to the taxpayers.)

Second, the court rejected the taxpayer’s position that the staking rewards were akin to a non-taxable stock dividend because the taxpayer’s interest in Cardano was increased. (If, for example, a sole owner of a corporation receives a stock dividend, they won’t have any income because they owned 100% of the corporation before and after the dividend.) This clearly misses the point. In eToro’s hands, the staking rewards should have been deferred income because no one paid the staking rewards for eToro. We’ll have to wait for the decision in Jarrett^[5] to hopefully see this analysis properly applied.

Third, the court rejected the taxpayer’s position that the receipt of the Cardano tokens was akin to a property owner removing minerals or growing crops (the income from which is not taxed until the minerals or crops are sold). This last holding appears to have prompted by the fact that the taxpayers themselves “lacked the power to decide whether (and when) the property was created.” The total inapplicability of this rule to the receipt of compensation for allowing another person to use your property should have provided a clue to the court that it employed the wrong analysis in determining the taxability of the tokens transferred to the taxpayer.

Very strong positions exist that the holding in Paschall should not result in the conclusion that a validator itself should not have taxable income when it receives tokens for providing validation services. In contrast to Paschall, when a validator generates proof-of-stake rewards, the analogy to growing crops and extracting minerals is much more apt. Furthermore, no one is paying the validator for services, the rewards are taken directly from the blockchain (the farmer is picking the crops from the vine). The conundrum of the interaction of traditional tax principles to proof-of-stake transactions is elegantly addressed by the Digital Asset PARITY Act. If this legislation is enacted, validators will be able to defer taxation of validation rewards received in 2026 and after until the rewards are sold. Such legislation is unlikely to help taxpayers, like the Paschalls, who received tokens for allowing their coins to be pledged by validators.

The Digital Asset PARITY Act
If enacted, PARITY would amend the Internal Revenue Code to address a wide range of digital-asset tax issues, including stablecoin payments, foreign investor trading, digital-asset lending, wash sales, constructive sales, mark-to-market accounting, staking and mining rewards, charitable contributions and passive staking by investment vehicles.^[6] For taxpayers, the bill matters because it would do two things at once. If enacted, it would reduce tax friction for certain routine digital-asset transactions, especially regulated payment stablecoins, while also extending traditional securities trading anti-abuse rules to digital-asset trading strategies. For more than a decade, federal tax law has largely answered digital-asset questions with one thought: digital assets are property. That answer has done a lot of work, perhaps too much. A rule built for sales and exchanges of property now has to account for dollar-pegged payment stablecoins, staking rewards, digital-asset lending, decentralized trading, charitable gifts and institutional investment vehicles. The Digital Asset PARITY Act stops pretending that all digital-asset activity is the same.

The Staking Compromise
We’ll start with the staking provisions in light of the discussion above regarding Paschall. Staking and mining present one of the harder conceptual problems in digital-asset tax law. As noted above, Revenue Ruling 2023-14 generally taxes proof-of-stake validation rewards when a cash-method taxpayer receives transferable coins because the ability to transfer the coins is evidence of dominion and control. That approach is administrable in theory, but in practice can create liquidity and valuation problems, especially where rewards are frequent, small, volatile or not immediately convertible into cash.

The PARITY Act would create a new subchapter W of the Code for digital assets acquired through validation activities.^[7] As a default rule, the fair market value of a newly created digital asset acquired through validation activity would be included in gross income as ordinary income, and basis would be increased by the amount included.^[8] Beginning in tax years beginning in 2026, the bill also would allow an election by a “specified taxpayer” to defer tax on newly created digital assets acquired during the election year. Specified taxpayers are those “who validated the digital asset transaction.” (Accordingly, the provision, even if effective in 2021, would not have helped the taxpayers in Paschall.) Taxpayers making this election would be required to capitalize specified transaction costs.^[9] The election would apply for the taxable year in which the election is made and the four successive taxable years thereafter unless revoked.^[10] As an offset to allowing deferral for electing validators, dispositions during the election period would produce ordinary gain or loss. Dispositions by electing validators after the election period would be treated as long-term capital gain or loss.^[11] For electing validators, this regime effectively creates a four-year holding period before the rewards would be treated as long-term capital gains.

Property Is Not Cash
The modern virtual currency tax story begins with IRS Notice 2014-21. In that guidance, the IRS concluded that virtual currency is treated as property for federal tax purposes and that general tax principles applicable to property transactions apply to transactions using virtual currency.^[12] The Notice also stated that virtual currency is not treated as currency for purposes of foreign-currency gain or loss rules.^[13] That classification has consequences. If a taxpayer uses appreciated cryptocurrency to buy goods or services, the taxpayer generally has a disposition of property.^[14] If the fair market value of what the taxpayer receives exceeds the taxpayer’s basis in the digital asset used, the taxpayer has taxable gain.^[15] Buying a cup of coffee with digital assets can become a small tax accounting exercise.

Digital Dollars Used Like Cash
The bill’s most intuitive provision addresses regulated payment stablecoins. Under proposed new Tax Code section 1046, beginning in taxable years in 2026, gain or loss generally would be recognized on the sale or exchange of a regulated payment stablecoin unless the taxpayer’s basis is 99% or more of the stablecoin’s redemption value.^[16] In an exchange of a regulated payment stablecoin, the acquirer’s basis would be deemed to be $1.^[17] The provision is limited: the stablecoin must be a payment stablecoin issued by a permitted payment stablecoin issuer, must be redeemable or repurchasable for a fixed amount of U.S. dollars, and must have been acquired by the taxpayer for a price within 1 percent of $1.^[18] Dealers and traders in securities or commodities are excluded.^[19]

The provision depends on the application of the separate stablecoin regulatory framework created by the GENIUS Act. The GENIUS Act defines payment stablecoins and permitted payment stablecoin issuers, generally limits issuance in the United States to permitted issuers and requires identifiable reserves backing payment stablecoins on at least a one-to-one basis.^[20] PARITY would use the regulatory status as a tax gatekeeper: digital dollars can be treated more like dollars only when issued within the regulated stablecoin regime.

One of the more notable features of the May 2026 version of the PARITY Act is what it does not do. The bill does not enact a broad de minimis exemption for all low-value digital-asset consumer transactions.^[21] Instead, it directs Treasury to study the compliance burden of small digital-asset transactions, the IRS’s ability to verify eligibility, potential abuse through transaction fragmentation or multiple wallets, the interaction with broker reporting under Code § 6045 and possible legislative or regulatory approaches.^[22] Treasury would be required to report to Congress within one year and issue interim guidance within 180 days identifying categories of transactions for which relief may already be available under existing authority.^[23] The bill expressly states that this study provision does not create a de minimis exclusion or provide independent authority for Treasury to implement one. That may disappoint taxpayers hoping for a simple de       minimis rule, such as the $200 per-transaction concept contemplated in the December 2025 discussion draft.^[24]

Integrating Cryptocurrencies into Existing Financial Asset Tax Code Provisions
The bill would extend existing trading safe harbor principles applicable to foreign taxpayers to digital assets for taxable years beginning after the bill is enacted.^[25] Under current Code § 864(b)(2), non-U.S. persons generally are not considered to be engaged in the conduct of a U.S. trade or business by reason of trading in stocks, securities and commodities through resident brokers, commission agents, custodians or other independent agents. The PARITY Act would add a similar rule for trading in certain digital assets through U.S. platforms.^[26] The policy objective is to reduce uncertainty that could push trading activity offshore. A clear safe harbor may help keep that activity on regulated U.S. platforms. This provision should be retroactive.

Second, the bill would extend Code § 1058 securities-lending principles to qualifying digital-asset loans beginning in taxable years after the bill is enacted.^[27] In traditional finance, a qualifying securities loan is not treated as a taxable sale when the lender transfers securities temporarily and receives identical securities back.^[28] Digital-asset lending can raise the same economic issue. Without a clear nonrecognition rule, some digital-asset lending arrangements could be treated as taxable dispositions, even though they economically resemble temporary financing transactions. (This creates loss harvesting opportunities for tokens with a basis in excess of value.) PARITY would move qualifying digital-asset lending closer to the familiar securities-lending model. It also provides a broad definition of when digital assets are substantially identical, but the fact that two tokens relay on the same protocol would not allow the lending of one cryptocurrency and the return of another free from gain recognition.

Third, the bill would close two gaps that have been attractive to sophisticated traders. It would extend wash-sale rules to digital assets, limiting the ability to sell digital assets at a loss and shortly thereafter reacquire substantially identical exposure for transactions undertaken after passage of the Act.^[29] It would also extend constructive sale rules to digital assets, targeting arrangements that economically lock in gain without an actual sale for transactions undertaken after passage of the Act.^[30] These provisions are the other side of parity: if digital assets are to receive rules comparable to traditional financial assets, they also should be subject to comparable statutory anti-abuse rules.

Finally, the bill would allow professional digital-asset dealers and active traders to elect mark-to-market accounting for actively traded digital assets in taxable years beginning after passage of the Act.^[31] That election would align certain digital-asset professionals with existing securities-market tax accounting concepts, while generally producing ordinary income or loss rather than capital gain or loss.

Charity, Funds and Passive Staking
The bill also addresses two institutional issues that have become more important as digital assets have moved into mainstream investment and charitable-giving channels. For charitable contributions, PARITY would distinguish between actively traded digital assets and less liquid assets. Contributions of actively traded digital assets would not be subject to the same qualified-appraisal requirements that apply to many harder-to-value assets.^[32] By contrast, digital assets that are not actively traded would be subject to substantiation rules and, if the charity sells the asset, a deduction cap based on the gross proceeds the charity actually receives.^[33] The policy is familiar: liquid, widely traded assets can be valued by market price, but illiquid assets invite valuation disputes.

For passive staking, the bill clarifies that certain passive protocol-level staking activity is not a trade or business, including for purposes of unrelated business taxable income and U.S. trade or business analysis.^[34] That provision matters for tax-exempt investors in investment funds, endowments, ETFs, digital-asset investment trusts and similar vehicles that may want digital-asset exposure without converting passive investment activity into active business activity merely because the investment vehicle participates in passive protocol-level staking without operating an active validation business.

Conclusion
The PARITY Act is not just a crypto tax relief bill. It is a tax architecture bill. Its most taxpayer-friendly provisions would reduce friction for regulated dollar stablecoins, provide more certainty for digital-asset lending and give validators a more flexible timing regime. Its anti-abuse provisions would bring digital assets into wash sale and constructive sale regimes long familiar to tax planning for financial transactions. Its institutional provisions would clarify charitable-giving and passive-staking issues that are increasingly relevant to funds, endowments and investment vehicles. That combination is the point. The bill’s theory is not that digital assets are always cash, always securities, always commodities or always something entirely new. The theory is that tax law should look more carefully at what digital assets are doing.

^{[1] TC Mem. 2026-46 (Dec. No. 7382-24).}

^{[2] The Digital Asset Protection, Accountability, Regulation, Innovation, Taxation, and Yields Act (the Digital Parity Act”), H.R. 8899 (119thCong. 2ndSess. 2026).}

^{[3] Code § 61(a)(5)}

^{[4] 348 U.S. 426 (1955)}

^{[5] Case No. 3:24-cv-1209 (Middle District Tenn.)}

^{[6] Digital Asset PARITY Act §§ 2-12.}

^{[7] Digital Asset PARITY Act § 8, proposed I.R.C. §§ 1400W-1 to 1400W-3.}

^{[8] Digital Asset PARITY Act § 8, proposed I.R.C. § 1400W-1.}

^{[9] Digital Asset PARITY Act § 8, proposed I.R.C. § 1400W-2(a).}

^{[10] Digital Asset PARITY Act § 8, proposed I.R.C. § 1400W-2(c)}

^{[11] Digital Asset PARITY Act § 8, proposed I.R.C. § 1400W-2(b), (d).}

^{[12] IRS Notice 2014-21, 2014-16 I.R.B. 938, Q&A-1.}

^{[13] IRS Notice 2014-21, 2014-16 I.R.B. 938, Q&A-2.}

^{[14] I.R.C. § 1001; IRS Notice 2014-21, 2014-16 I.R.B. 938, Q&A-6.}

^{[15] I.R.C. §§ 61(a)(3), 1001; Treas. Reg. §§ 1.61-6(a), 1.1001-1(a); IRS Notice 2014-21, 2014-16 I.R.B. 938, Q&A-6.}

^{[16] Digital Asset PARITY Act § 2, proposed I.R.C. § 1046(a).}

^{[17] Digital Asset PARITY Act § 2, proposed I.R.C. § 1046(b).}

^{[18] Digital Asset PARITY Act § 2, proposed I.R.C. § 1046(d).}

^{[19] Digital Asset PARITY Act § 2, proposed I.R.C. § 1046(e).}

^{[20] GENIUS Act, Pub. L. No. 119-27, §§ 2-4, 139 Stat. 419, 420-29 (2025); 12 U.S.C. §§ 5901(22)-(23), 5902(a), 5903(a)(1)(A).}

^{[21] Digital Asset PARITY Act § 12(d).}

^{[22] Digital Asset PARITY Act § 12(a); I.R.C. § 6045.}

^{[23] Digital Asset PARITY Act § 12(a)-(b).}

^{[24] Miller-Horsford Digital Asset Tax Bill Discussion Draft § 1, proposed I.R.C. § 139J, Explanatory Note (Dec. 2025).}

^{[25] Digital Asset PARITY Act § 3, proposed amendments to I.R.C. § 864(b)(2).}

^{[26] Digital Asset PARITY Act § 3, proposed amendments to I.R.C. § 864(b)(2).}

^{[27] Digital Asset PARITY Act § 4, proposed amendments to I.R.C. § 1058.}

^{[28] I.R.C. § 1058.}

^{[29] Digital Asset PARITY Act § 5, proposed amendments to I.R.C. § 1091.}

^{[30] Digital Asset PARITY Act § 7, proposed amendments to I.R.C. § 1259.}

^{[31] Digital Asset PARITY Act § 6, proposed amendments to I.R.C. § 475.}

^{[32] Digital Asset PARITY Act § 9, proposed amendments to I.R.C. § 170(f)(11).}

^{[33] Digital Asset PARITY Act § 9, proposed I.R.C. § 170(f)(20).}

^{[34] Digital Asset PARITY Act § 10, proposed I.R.C. § 7701(p); I.R.C. §§ 512, 864.}