House Democrat Floats China Risk Reporting, Crypto Tax Reforms

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Rep­re­sen­ta­tive Brad Sher­man (D‑CA) on Novem­ber 9, 2023, rolled out draft leg­is­la­tion that would expand risk dis­clo­sures relat­ed to pub­lic com­pa­nies’ reliance on Chi­na. Sher­man also float­ed bills to tax gains from both cryp­to invest­ments and secu­ri­ties of com­pa­nies based in Rus­sia, Chi­na, and oth­er “coun­tries of con­cern” as ordi­nary income.

Sher­man, a for­mer CPA and cur­rent rank­ing mem­ber of Finan­cial Ser­vices Committee’s Cap­i­tal Mar­kets sub­com­mit­tee, rolled out the clus­ter of bills for the committee’s mem­ber day hearing.

The planned leg­is­la­tion reflects Sherman’s long-run­ning crit­i­cism of both cryp­to and China.

Under his Chi­na Risk Report­ing Act, a pub­lic com­pa­ny would be required to dis­close annu­al­ly a descrip­tion of the degree to which their sup­ply chain relies on or is exposed to mar­kets of main­land Chi­na, Hong Kong, Macau and Tai­wan, as well as the oper­a­tions of the com­pa­ny in each of those markets.

A pub­lic com­pa­ny would also need to include a nar­ra­tive descrip­tion of risk fac­tors asso­ci­at­ed with a “hypo­thet­i­cal, immi­nent, or ongo­ing cov­ered event,” includ­ing any con­se­quences for the company’s oper­a­tions caused by sup­ply chain dis­rup­tions or the “deval­u­a­tion, seizure, denial of access, or nation­al­iza­tion” of the company’s assets in those and cer­tain oth­er for­eign mar­kets, among oth­er dis­clo­sures. The com­pa­ny would also need to dis­close, in cer­tain cas­es, whether it has a con­tin­gency plan in place to min­i­mize the con­se­quences of those cov­ered events.

The bill defines a cov­ered event as a Chi­nese mil­i­tary action against Tai­wan or a “sig­nif­i­cant dis­rup­tion” to eco­nom­ic rela­tions between the U.S. and Chi­na, includ­ing trade embar­goes or finan­cial sanctions.

Sher­man, for the hear­ing, also post­ed drafts of the No Cap­i­tal Gains Allowance for Amer­i­can Adver­saries Act and the Cryp­tocur­ren­cy Tax­a­tion Act of 2023.

He framed the for­mer bill as a means to strip pref­er­en­tial tax treat­ment from invest­ments in adver­sar­i­al nations. The mea­sure tar­gets stocks or oth­er secu­ri­ties of enti­ties incor­po­rat­ed in so-called coun­tries of con­cern: Chi­na, Rus­sia, Belarus, and Iran. It also applies to prop­er­ty locat­ed or used in those coun­tries. Under Sherman’s bill, gains from the sale or exchange of those assets would be treat­ed as ordi­nary income instead of a cap­i­tal gain. Those invest­ments would also be inel­i­gi­ble for a step-up in basis at death used to cut the tax bur­den on inher­it­ed assets.

“As you know, we encour­age Amer­i­cans to invest in stock not only by pro­vid­ing a cap­i­tal gains allowance, but a step-up in basis upon death,” Sher­man told the com­mit­tee. “That’s because we believe we want to encour­age invest­ment in Amer­i­can com­pa­nies in the Amer­i­can econ­o­my. So why in the hell are we pro­vid­ing these incen­tives for invest­ing in the Chi­nese econ­o­my, or that of Rus­sia, Belarus, or Iran?”

The lat­ter bill would require that the gain from the sale or exchange of a dig­i­tal asset be treat­ed as ordi­nary income, while loss from the sale or exchange would be treat­ed as a cap­i­tal loss. The mea­sure would also spec­i­fy that a tax­pay­er can­not claim cap­i­tal loss­es based on “wash sales” from sell­ing and then quick­ly buy­ing back dig­i­tal assets.

“His­tor­i­cal­ly, cap­i­tal gains allowances were jus­ti­fied on the basis that such allowances stim­u­lat­ed the financ­ing and start-up of Amer­i­can busi­ness, which in turn cre­ates jobs and builds the Amer­i­can econ­o­my,” Sher­man explained in pre­pared tes­ti­mo­ny. “How­ev­er, invest­ments in cryp­tocur­ren­cies accom­plish none of those pol­i­cy objec­tives and there is no jus­ti­fi­ca­tion for such invest­ments to be taxed at a rate low­er than the income tax rate our staffs pay.”

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