A markup in the Ways and Means Committee today perpetuates the legal mistake made by the IRS

The House Ways and Means Committee convened on September 16, 2026, to conduct a markup session on a pivotal piece of legislation concerning digital asset taxation. While the bill aims to resolve long-standing friction between the decentralized finance sector and federal tax authorities, industry advocates argue that the current legislative language inadvertently codifies a flawed interpretation of how newly created crypto assets should be classified under the Internal Revenue Code.

At the heart of the controversy is the tax treatment of block rewards—the tokens generated by blockchain protocols as compensation for miners and validators who secure and verify networks. Coin Center, a leading advocacy group, contends that the current bill, despite its positive steps toward simplifying accounting for everyday users, risks cementing the IRS’s long-held but legally contested stance that these rewards constitute immediate taxable income upon creation.

The Evolution of IRS Guidance on Digital Assets

To understand the current impasse, one must look at the timeline of federal digital asset policy. Since the nascent days of Bitcoin, the Internal Revenue Service has struggled to reconcile decentralized ledger technology with traditional tax principles.

In 2014, the IRS issued Notice 2014-21, which established the foundational—and, according to many legal scholars, incorrect—premise that virtual currencies should be treated as property for federal tax purposes. While this provided a framework, it left significant ambiguity regarding the "taxable event." In 2023, the IRS doubled down on this approach, clarifying that taxpayers must report income when they receive "staking rewards" or mining yields.

The industry has pushed back, most notably through the Jarrett v. United States litigation. The plaintiffs in the Jarrett case argue that the act of creating a token via protocol participation is akin to manufacturing a good or harvesting a crop: it is the production of property, not the realization of income. Income, they argue, only arises when that property is exchanged or sold in a market transaction. As of September 2026, the Jarrett case is nearing a summary judgment decision, making the timing of the House Ways and Means Committee’s markup particularly sensitive.

The "Income vs. Property" Distinction

The legislative debate in Washington has frequently focused on the question of timing—specifically, whether miners and validators should be permitted to defer tax payments on block rewards until the tokens are liquidated. Proponents of a five-year deferral provision argue that it provides necessary liquidity for developers and infrastructure providers.

However, advocates like Jason Somensatto, a senior policy expert at Coin Center, argue that this framing misses the fundamental point of contention. The argument is not for a delay in payment, but for a fundamental change in classification. If a validator creates a token through their participation in a network, they have created a new asset. By treating that creation as an "income event," the government is essentially taxing individuals on the existence of their own production before they have realized any economic gain.

To illustrate this, experts point to the "Jason Dollars" analogy. If an individual crafts a token or a physical voucher as part of an experimental economy, the act of creation does not generate taxable income. The value only becomes taxable when the asset is sold for fiat or another valuable consideration. By bypassing this distinction, the committee’s current bill risks treating every automated, protocol-driven token issuance as an immediate tax liability, regardless of whether the asset has market liquidity or an ascertainable fair market value.

Analysis of the Proposed Bill’s Section 401

The primary concern regarding the current markup lies in Section 401 of the proposed legislation. The text explicitly refers to "mining and staking income" and mandates that these activities be treated as "ordinary income" rather than capital gains.

From a regulatory standpoint, this language carries heavy implications. By explicitly labeling the rewards as "income" within the statutory text, the bill may inadvertently provide the IRS with a congressional mandate to continue its current enforcement actions. Even if the bill does not state when the income arises, the inclusion of the term "income" effectively precludes the argument that the creation of the token is a non-taxable event.

Tax attorneys observing the markup suggest that if Section 401 passes in its current form, it could undermine the legal strategy currently being deployed in the Jarrett case. By creating a legislative precedent that characterizes validation as an income-generating activity, Congress would be weighing in on a matter that is currently being adjudicated by the federal courts.

Broader Economic and Regulatory Implications

The implications for the crypto industry are significant. If validation and mining are categorized as ordinary income, providers of these services will face a high tax burden that does not account for the volatility of the underlying assets. Furthermore, the administrative burden of calculating the fair market value of thousands of daily, small-value token distributions creates a significant compliance hurdle for individual validators.

Industry groups suggest several paths forward that would allow the bill to move ahead without causing collateral damage to the legal debate:

1. Neutral Language: Amend the bill to refer to "block rewards" or "protocol distributions" rather than "mining income," thereby avoiding a statutory characterization of the event as taxable income.
2. Explicit Deferral: Include a clear provision that stipulates that no tax event occurs until the underlying asset is sold or exchanged for other property.
3. Preservation Clause: Add a "savings clause" that states that the Act does not intend to determine whether the creation of block rewards constitutes a realization event under existing law, thus leaving the question to be resolved by the courts.

Congressional Engagement and Future Outlook

The House Ways and Means Committee has engaged extensively with stakeholders, including blockchain developers, tax experts, and legal advocates. There is a palpable desire among committee members to provide "tax certainty," a goal that the industry supports. However, the definition of certainty remains a point of contention. For the committee, certainty means clear, enforceable rules for the IRS; for the industry, it means a legal environment that does not penalize the underlying mechanics of decentralized technology.

As the markup continues, the committee faces a delicate balancing act. If they proceed without clarifying the "income" terminology, they risk alienating a significant portion of the digital asset community who believe the legislation is being used to codify a flawed IRS position.

The next few weeks will be critical. If the bill reaches the House floor, the debate will likely shift toward whether the legislature should be in the business of defining the taxability of nascent technologies before the courts have rendered a final verdict. For now, the crypto industry remains in a state of watchful waiting, hoping that the final version of the bill will preserve the existing legal debate rather than foreclosing it in favor of a controversial administrative interpretation.

Ultimately, the goal of tax reform should be to facilitate economic growth while ensuring fairness. Whether the current iteration of the Ways and Means proposal achieves this balance remains to be seen, as the tension between protocol-native mechanics and traditional tax law continues to complicate the path toward a comprehensive federal framework.