Government shuts down, Senate contemplates crypto tax changes

Tax Hot Topics

Congress allowed the federal government’s discretionary funding to lapse at the end of the federal fiscal year (Sept. 30), leading to a government shutdown that is now approximately a week old.  

The main disputes are over a Democratic push to extend tax credits intended to subsidize premiums for health insurance purchased through the Affordable Care Act (also known as Obamacare) marketplaces, which expire at the end of the calendar year, and the Trump administration’s ongoing efforts to unilaterally rescind funds previously appropriated by Congress. Typically, rescissions are voted on by Congress, as happened with repeated rescissions of billions of dollars in increased IRS funding created by the 2022 Inflation Reduction Act, or earlier this year with funding for public broadcasting. The administration’s attempts to unilaterally rescind funding have faced legal challenge and have undermined negotiations, as congressional Democrats say they do not trust that the administration will not attempt to rescind more agreed-upon funding in the future.

Consensus over a path forward to funding the government appeared to be far off on Oct. 6, as the shutdown entered its first full week.

The IRS is largely insulated from the impact of the government funding lapse, as outlined in an operational plan published on Sept. 29. While the increased enforcement funding provided by the IRA has been rescinded, billions in multiyear operational funds remain, allowing the agency to maintain operations without significant interruption. The Trump administration and congressional Republicans have pushed for additional funding cuts to the IRS in the months leading up to the shutdown, though the agency is not at the center of current negotiations. Customs and Border Protection, central to the administration’s tariff and trade efforts, also will continue to operate without furloughs or layoffs as of Oct. 6 and expects to move forward with new tariff enforcement guidance on previously established timelines. However, ongoing threats of additional governmental layoffs by Office of Management and Budget Director Russell Vought could lead to additional reductions in force at the agencies. Specifics of those potential layoffs remain scarce so far. 

Senate tax writers debate digital asset tax treatment

The ongoing funding dispute colored an Oct. 1 Senate Finance Committee hearing on the taxation of digital assets, as multiple committee Democrats complained about holding the hearing while the government was shut down. Some in the minority also raised skepticism over whether tax changes should be made for cryptocurrencies and other digital assets, though a majority of the committee seemed open to the idea. As part of a broader overhaul of cryptocurrency and stablecoin regulation in the U.S., there are multiple proposals currently under discussion to allow de minimis tax treatment of cryptocurrency transactions, change how cryptocurrency mining income is taxed, and tax digital asset trading in the same way as equity trading.

The Senate also is expected to take up financial regulatory changes to crypto markets before the end of the year, possibly pairing tax and financial regulatory overhauls together. A bill changing regulations around digital assets pegged in value to previously existing currencies was passed and signed into law in July. 

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