Soon-to-be reintroduced Token Taxonomy Act can add clarity to crypto space

With Ohio Congressman Warren Davidson stating recently that he plans to reintroduce the bipartisan Token Taxonomy Act with Florida Congressman Darren Soto, it is worth reviewing the key aspects of the bill and the impact they might have on all aspects of the cryptocurrency ecosystem. The bill, if passed, is expected to add much-needed clarity to the cryptocurrency space as a whole.

The bill aims to amend the Securities Act of 1933 and the Securities Exchange Act of 1934 to exclude "digital tokens" from the definition of a security. In addition to this key change, the bill would adjust taxation for virtual currencies held in retirement accounts similar to the treatment of "bullion." And an exchange of one cryptocurrency for another would no longer be considered a taxable event.

In another major change, crypto to cash transactions would be exempt from tax as long as they do not exceed a value of $600. This amendment would allow Bitcoin and other cryptocurrencies to be used for everyday purchases, such as buying a cup of coffee, without triggering a taxable event.

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The bill sets out a list of criteria that would need to be met to be considered a digital token. The digital token would need to have been created "in response to the verification or collection of proposed transactions," have a distributed transaction history, be able to be transferred or traded peer-to-peer without an intermediary, and not be a representation of a financial interest in a company. The rules of the asset would also not be able to be altered by a single person or group under common control, suggesting it would need to be "decentralized."

There has been much concern over the legality of Initial Coin Offerings( ICOs) and pre-sales over the past few years. A hopeful interpretation of the proposed bill suggests the end may be in sight for much of the legal confusion around digital tokens in the Unites States. Token pre-sales may be considered legal as long as the fit all of the other criteria for being a "digital token." Specifically, the bill mentions "initial allocations," as long as the initial allocation was part of its initial rules.

Despite all of these possible modifications, if a particular token is a eventually deemed to be a security, the party responsible would have 90 days to make this news public to investors. All remaining funds excluding whatever had been genuinely spent already on the development of the digital unit would need to be returned.

At this point, the Token Taxonomy Act is still at the proposal stage and far from becoming law. However, it provides a framework and glimmer of hope for clearer rules that could lead to more US investment in cryptocurrencies and the supporting infrastructure and ecosystem.

About Author

John has been involved in the blockchain/crypto sector since late 2013 and joined The Block Research in early 2019. He has expertise in crypto private markets and M&A activity. He also has a background in finance.