Executive summary: The Senate ADAPT Act

The Aligning Digital Assets with Principles of Taxation Act (ADAPT Act), introduced in the Senate, would fit digital assets into familiar U.S. international tax rules. It would source staking and mining rewards largely by whether the recipient is a U.S. person, let foreign investors trade qualifying tokens through U.S. agents without being engaged in a U.S. trade or business, extend nonrecognition to digital asset loans and everyday stablecoin payments, and open a path for foreign decentralized autonomous organization (DAO) foundations to move onshore.

A parallel bill approved by the House Ways and Means Committee overlaps substantially but would go further for U.S. owners of offshore crypto businesses.

The legislative outlook on these bills is unclear, but affected taxpayers who assess their potential exposure now can be prepared to implement provisions that would take effect on enactment or in 2027.

Why digital assets strain international tax rules

U.S. international tax rules turn on a handful of questions: Where is income sourced? Is a foreign person engaged in a U.S. trade or businessfrom which it derives effectively connected income (ECI)? If not, is U.S.-source investment income subject to the 30% gross-basis tax usually collected through withholding? Does a treaty change the answer? Each question assumes the income has a location and fits a familiar category, such as services, interest, rents or gain on a sale.

Digital assets often don’t fit existing income categories. Blockchains depend on participants called validators, who verify and record transactions. In proof-of-work networks such as Bitcoin, “miners” contribute computing power. In proof-of-stake networks such as Ethereum, validators lock up, or “stake,” tokens as collateral. Either way, the network pays them in newly created tokens and fees. The network has no physical location, and a reward is not clearly payment for a service, a return on property or anything else the Internal Revenue Code recognizes.

Current law also offers little certainty on whether crypto trading qualifies for the long-standing securities and commodities safe harbors, or whether a crypto loan is a taxable exchange.

Today, the IRS treats digital assets as property (Notice 2014-21). Mining rewards are income when received, and a cash-method taxpayer’s staking rewards are income when the taxpayer gains dominion and control over them (Rev. Rul. 2023-14). In June, the Tax Court held in Paschall v. Commissioner (T.C. Memo. 2026-46) that staking rewards received through a digital asset platform were taxable on receipt because the taxpayer could sell them at any time.

The ADAPT Act’s source-rule section states that it would create no inference about whether or when validation rewards are includible in income. It would address instead where income comes from and how cross-border activities are characterized.

Key international and other provisions in the ADAPT Act

1. Sourcing of staking and mining rewards

Today. The Code has no source rule written for validation rewards. Depending on how a reward is characterized, practitioners have analogized to the rules for services (sourced where performed) or for property, with uncertain results.

The proposal. New section 863(f) would generally treat validation income from staking, mining and similar activities as U.S.-source for a U.S. person and foreign-source for a foreign person. Two branch exceptions follow the activity rather than the owner: Business profits attributable to a U.S. person’s qualified business unit (QBU) in a foreign country, meaning a separate unit of a business that keeps its own books and records, would be foreign-source; and income attributable to a foreign person’s U.S. office or other fixed place of business would be U.S.-source.

For mining, Treasury’s attribution rules would have to take into account the location and relative contribution of the computing equipment; where the personnel who operate, manage or maintain it are located; and other factors Treasury considers appropriate. Unless Treasury specifies otherwise, the rule would apply partner by partner, so for a fund classified as a partnership, the fund’s offshore domicile would not determine the location for its partners. An offshore fund classified as a corporation would itself be the foreign recipient. Mining pool rewards would count as validation income, but compensation for mining-related services to others, such as hosting and equipment management, would not. The rule would apply to income derived after enactment.

Why it matters. Source drives the foreign tax credit limitation and, for foreign persons, U.S. tax exposure, including withholding. Consider three examples:

• A U.S. company stakes tokens through a provider in Singapore but has no foreign branch. Its rewards would be U.S.-source. If a foreign country taxes them, the company may be unable to credit that tax, because the foreign tax credit is limited to the U.S. tax on foreign-source income.
• A foreign mining company operates a facility in Texas. Its rewards from that site would be U.S.-source under the branch exception and likely ECI, taxed on a net basis and potentially subject to branch profits tax.
• A foreign company with no U.S. office stakes tokens through a U.S. staking provider. Under both bills, its rewards would be foreign source, because the U.S. office exception turns on an office the foreign company itself maintains, not on where its provider is located (absent contrary Treasury guidance). The rewards would therefore fall outside the 30% tax on U.S.-source investment income and the withholding that collects it, without relying on a treaty.

A foreign-source label is not an exemption for U.S. persons, who are taxed on worldwide income; for them the label matters mainly for the foreign tax credit. For foreign persons and the U.S. platforms that pay them, sourcing determines whether U.S. withholding applies at all. Under current law, the source of rewards is unsettled, so a U.S. platform crediting rewards to foreign customers must decide whether to withhold. Neither bill would amend the withholding rules directly, although the House bill would direct Treasury to study the withholding burdens of cross-border digital asset transactions, including those involving staking rewards.

2. A trading safe harbor for foreign investors

Today. Section 864(b)(2) has long allowed foreign persons to trade stocks, securities and commodities for their own account, including through a U.S. investment manager, without being engaged in a U.S. trade or business. This rule is what makes the offshore-fund-with-a-U.S.-manager model work. Whether a given digital asset qualifies as a security or commodity for this purpose is often unclear.

The proposal. The bill would extend the safe harbor expressly to “traded digital assets”: fungible tokens with exchange quotations that reflect enough volume and liquidity for reliable price discovery. Trading through a resident broker, custodian or other independent agent would be covered, as would trading for the taxpayer’s own account through employees or agents, even ones with discretionary authority. Dealers would not be allowed to use the own-account rule. Tokenized stocks and other tokenized real-world assets would be excluded from the new category (a tokenized security could still rely on the existing rule for securities), and unique non-fungible tokens and thinly traded tokens would generally not qualify. The rule would apply to taxable years beginning after Dec. 31, 2026, with no inference for earlier years.

Why it matters. A Cayman fund that buys and sells Bitcoin and Ether through a New York manager would have a clear statutory basis for keeping its trading gains outside U.S. tax. The safe harbor covers only trading, however. The bill lists a “staking provider” among the agents a fund may trade through, but that does not make staking itself trading. A fund that also runs validators, makes loans, makes markets for customers or provides services would still need to analyze those activities separately. If they create ECI, partnership withholding under section 1446 could apply to foreign partners. U.S. investors in offshore vehicles would also still face the CFC, subpart F, net CFC tested income (NCTI) and PFIC rules.

3. Bringing foreign DAO foundations onshore

Today. Many crypto projects have placed their governance and treasury in foundations in jurisdictions such as the Cayman Islands or Switzerland, often in response to U.S. regulatory uncertainty. A foundation’s foreign-law form and stated nonprofit purpose do not determine its U.S. tax classification. Depending on the facts, it may be a corporation, partnership or trust. If it is a corporation, moving it to the United States today can trigger the inbound reorganization rules of section 367(b) and owner-level income.

The proposal. Section 14 of the Senate bill would direct Treasury, within 12 months of enactment, to issue guidance on how qualifying foreign DAO foundations can reorganize as domestic C corporations and on the treatment of related U.S. persons and U.S. persons involved in their governance. The guidance must include, in appropriate circumstances, temporary safe harbors to encourage entities organized before Sept. 24, 2026, to complete those reorganizations promptly after enactment.

Why it matters. The provision promises future guidance, not current relief. It does not authorize tax-free domestication today or erase historical liabilities. Foundations considering a move should start by settling their U.S. classification and ownership, then compare staying offshore, adding a U.S. subsidiary and full domestication. That comparison should account for the fact that a domestic corporation is taxed on its worldwide income.

4. Lending digital assets without triggering gain

Today. Section 1058 lets a lender of securities avoid recognizing gain when it lends them and gets identical securities back. Most native crypto assets are not clearly securities, so it is unclear whether lending tokens to a platform or protocol is a taxable exchange.

The proposal. The bill would extend section 1058 to loans of traded digital assets under agreements that meet its existing conditions: return of identical assets, payments to the lender equivalent to any distributions during the loan, no reduction in the lender’s risk of loss or opportunity for gain, and any other requirements Treasury sets. To the extent Treasury provides, the required equivalent payments would include amounts equivalent to staking rewards, other protocol distributions and staking-related fees. The change would apply to transfers after enactment.

Why it matters. A U.S. investor lending tokens with a $20,000 basis and a $30,000 value would not recognize the $10,000 built-in gain on a qualifying loan. The relief covers the transfer only. Lending fees and substitute payments still need their own analysis, and arrangements in which the lender receives a different “receipt token,” including many DeFi deposits, should not be assumed to qualify. For cross-border loans, the character and source of each payment stream determine whether 30% withholding applies. Under current law and the Senate bill, a crypto lending fee should not be assumed to be interest eligible for the portfolio interest exemption. The House bill goes further: It would treat stablecoin loans as debt, so their yield would be interest, and would treat lending fees and substitute payments received by CFCs as subpart F income.

5. Allowing everyday stablecoin purchases without triggering gain

Today. Paying for goods or services with any digital asset, including a dollar-pegged stablecoin, is a disposition of property. A purchase can therefore produce a small gain or loss that technically must be reported.

The proposal. New section 1034 would provide that no gain or loss is recognized when a “covered payment stablecoin” is used to buy goods or services. Three conditions apply: The coin must be issued by a permitted issuer under the GENIUS Act (or an authorized foreign issuer). It must appear on Treasury’s most recent list, published at least quarterly, of stablecoins that actively traded within 3% of $1.00 over the preceding 12 months. And the taxpayer must have acquired it at a price within 3% of $1.00.

Traders, brokers and dealers in stablecoins would be excluded, as would any taxpayer or QBU whose functional currency is not the U.S. dollar. Brokers would not have to report qualifying transactions. The rule would apply to transactions entered into after Dec. 31, 2026.

Why it matters. A U.S. business paying a supplier in a qualifying stablecoin would no longer recognize small gains and losses on each payment, although it would still need records showing which payments qualify. A foreign branch of the same business with a euro functional currency, making the same payment with the same coin, would not qualify. The House bill takes a different approach, treating qualified stablecoins as worth their redemption value, but it has the same functional-currency exclusion. Multinationals should map functional currencies before planning around either version.

Other provisions to watch

Beyond its international provisions, the ADAPT Act would add elective mark-to-market rules for dealers and traders; apply the wash-sale and constructive-sale rules to digital assets; and address charitable contributions, small network fees, trusts, publicly traded partnerships, tax-exempt organizations that stake through others and the registration-required (bearer) obligation rules.

Under the wash-sale change, for example, an investor who sells a traded digital asset at a loss and buys it back within 30 days could no longer deduct the loss currently. The Senate version would apply only to sales after enactment and would not reach tokens acquired before enactment. The House version would apply to dispositions after Sept. 14, 2026, which could affect loss harvesting this year. These provisions could affect a fund’s tax profile and its investors even when the international rules do not apply.

Comparing the House and Senate proposals

The House and Senate bills overlap substantially. Both address the sourcing of validation income, the trading safe harbor, asset lending, wash sales, mark-to-market elections, stablecoins and DAO foundations.

The most important difference is the House’s subpart F expansion. It would treat digital asset gains, staking and mining income, and lending fees and substitute payments as foreign personal holding company income. Validation income would be excluded only if it comes from an active validation business, substantially all of the CFC’s digital assets relate to that business, and substantially all of the business is conducted in the CFC’s country of organization (or, for a QBU, in the country where the unit has its principal office and conducts substantial business activity). That change could produce current inclusions for U.S. owners of offshore crypto businesses and affect PFIC testing. It would apply to taxable years of foreign corporations ending after enactment, so a lame-duck enactment could reach a calendar-year CFC’s income for all of 2026. The Senate bill has no counterpart.

The House bill also targets U.S. citizens who move to Puerto Rico or another U.S. territory. For those who lived in the United States at any time in the prior 10 years, gains on traded digital asset property (including related derivatives and some interests in entities holding digital assets) would be U.S.-source except to the extent the taxpayers timely report the value and basis of their holdings as of the end of the year before the move and show that the gain reflects appreciation while they were bona fide residents of the territory. The Senate bill has no counterpart.

Both bills track several tax recommendations issued in July 2025 by the President’s Working Group on Digital Asset Markets, including extending the rules on wash sales, securities lending, mark-to-market and trading –safe harbors to digital assets. The report is policy context, however, and does not amount to an administration endorsement of either bill’s details.

Post-midterm legislative outlook

The ADAPT Act contains a number of tax provisions that a lame-duck Congress might consider depending on the potential outcome of the November elections. If control of the House and possibly the Senate shifts, the current majorities may see the post-election session, scheduled to begin Nov. 9, as their best opportunity to move priorities such as digital asset tax legislation. The bipartisan Ways and Means committee support for the House proposal and the substantial overlap between the two bills would give negotiators a starting point.

Signals on digital asset tax legislation are mixed. Sen. Cynthia Lummis (R-Wyo.), an ADAPT Act cosponsor, told Bloomberg that Finance Committee members are “reluctant to reopen the tax code” in a lame-duck session.

Whether or when any of these provisions will be enacted, or in what form, remains uncertain. But with several provisions proposed to take effect on enactment or in 2027, and some House provisions reaching back into 2026, affected taxpayers are advised to watch these rules closely and to consider their impact if any provisions come into force beginning next year.