PARITY Act Explained: What It Means for Your Crypto Staking Tax and DeFi Tax

Congress is working on multiple fronts to overhaul how crypto is taxed in the US, and a newly circulated draft bill is adding real detail to what those changes could look like. The PARITY Act (Digital Asset Protection, Accountability, Regulation, Innovation, Taxation, and Yields Act) sits alongside the better-known CLARITY Act as a companion tax-focused proposal. For anyone trying to understand how is crypto taxed in the US right now, or how those rules might shift, this draft deserves your attention even though nothing is law yet.

What Is the PARITY Act and Where Does It Stand?

The PARITY Act draft was released on 20 December 2025 by Ways and Means Committee members Representative Max Miller (R-Ohio) and Representative Steven Horsford (D-Nev.). It builds on earlier work from Senator Cynthia Lummis (R-Wy.) and a framework circulated by the Trump administration. The bill is explicitly described as an early-stage discussion draft: several provisions are still marked as being under technical review, and the lawmakers themselves acknowledge that key issues remain unresolved.

How It Fits Into the Broader Legislative Picture

The CLARITY Act passed the House on 17 July in a 294-to-134 vote and is now moving through two Senate committees simultaneously. The Senate Banking Committee postponed a markup after disagreements surfaced in January 2026, while the Senate Agriculture Committee pushed its own markup back and was targeting committee action by 27 January. For both chambers to send something to the President's desk, lawmakers would need to merge the two Senate versions and reconcile them with the House-passed bill.

The PARITY Act is the tax companion to that regulatory effort. Lawmakers originally set an ambitious goal of completing the tax legislation by the end of the first quarter of 2026, though that timeline has already shown signs of slipping. The overlapping committee jurisdictions across both chambers make the path complicated. That said, BDO notes that the prospect of a completed bill in 2026 is, in their assessment, very real.

You can read more background on the what the CLARITY Act means for your crypto tax and the stablecoin and staking reward tax rules already moving through Congress.

Crypto Staking Tax: A Potential Five-Year Deferral Election

This is the provision most individual holders will care about most. Under current IRS guidance, staking rewards are treated as taxable income at the moment you obtain dominion and control over them. That's the rule set out in Revenue Ruling 2023-14. Mining rewards have been treated similarly since Notice 2014-21, though in both cases the IRS has not directly resolved whether the income is ordinary or something else.

What the Draft Proposes

The PARITY Act would create an optional election allowing you to defer recognising mining and staking rewards as income for up to five years, or until you sell the rewards if that happens sooner. When recognition does occur, the income would be treated as ordinary income based on the fair market value of the rewards on that recognition date.

The draft defines "mining and staking activity" broadly as validating transactions on a cryptographically secured distributed ledger, plus activities closely related to that. Separately, the draft signals a policy direction intended to confirm that passive, protocol-level staking does not rise to the level of a trade or business. That distinction matters for self-employment tax purposes. However, the provision is still described as being under technical drafting review, so the mechanics are not yet finalised.

How the Lummis Bill Differs

The Lummis bill takes a different approach: under that proposal, mining and staking rewards would not be recognised as income at all until the point of sale, again with ordinary income treatment. The two bills therefore agree on the character of the income (ordinary) but disagree sharply on the timing mechanism. That gap will need to be bridged in negotiations before any final bill can emerge.

For practical purposes, if you're currently calculating whether staking is taxable in the current tax year, the answer under existing IRS rules remains yes, at the point of receipt. These proposals are not yet law.

Wash Sale Rules: The Change That's Almost Certain to Happen

Currently, the wash sale rules under the Internal Revenue Code do not apply to digital assets. That means you can sell crypto at a loss, buy the same asset back within 30 days, and still claim the loss for tax purposes. Many holders have used this strategy deliberately when thinking about how to calculate crypto taxes efficiently.

What the Draft Proposes

The PARITY Act would close that gap. Under the draft, any loss on a sale of a digital asset would be disallowed if you acquired a substantially identical asset within 30 days before or after the sale or exchange. Digital assets would be defined by reference to the broker reporting rules in Section 6045, and the wash sale treatment would also extend to notional principal contracts and derivative instruments referencing digital assets.

This provision is consistent with the Lummis bill and has administration support. Because it raises revenue that helps pay for the more favourable provisions elsewhere in the package, analysts view it as highly likely to survive into any final enacted version. The current PARITY Act draft would apply starting from the tax year beginning after the date of enactment. The Lummis bill would make it effective for tax years beginning after 2025.

What This Means for You Right Now

If you've been relying on tax-loss harvesting with quick repurchases to manage your crypto tax position, this window may close. BDO specifically flags that it may be possible to reset your cost basis in certain positions before an effective date is locked in, but that window depends entirely on when, and whether, the bill is enacted. Watch the legislative calendar carefully.

There's also a nuance worth noting: while there's broad agreement that current wash sale rules don't apply to spot digital asset holdings, it's less settled whether those rules already cover certain derivative transactions. The PARITY Act would clear up that ambiguity by explicitly bringing derivatives into scope.

Mark-to-Market Election for Traders and Dealers

The PARITY Act would introduce an optional mark-to-market election under Section 475 for traders and dealers in digital assets. If you qualify and make the election, you'd recognise gain or loss on publicly traded digital assets based on their fair market value on the last business day of the tax year, with all resulting gain or loss treated as ordinary income or loss.

Who This Would Affect

For active traders, this could simplify the record-keeping burden significantly. Instead of tracking the cost basis of every individual transaction across the year, the year-end mark-to-market value becomes the anchor. The administration's draft framework also supports this option.

There is, however, a practical challenge: reliable, consistent pricing sources across different exchanges and trading venues don't yet have a uniform standard for year-end valuation. The Lummis bill addresses this more explicitly by defining "specified digital assets" and the criteria for traders and dealers more precisely. The PARITY Act draft is less specific on these points, and those details would need to be resolved before the election could work cleanly in practice.

Constructive Sale Rules: A Placeholder for Now

The PARITY Act draft reserves a section for constructive sale rules under Section 1259 but does not yet include actual legislative language. The stated policy direction is to treat a taxpayer as having made a constructive sale when they enter into one or more transactions that substantially eliminate both the risk of loss and the opportunity for gain on an appreciated digital asset position.

In plain terms, this would target strategies where you effectively lock in a gain economically without triggering a taxable sale, for example through certain hedging or synthetic arrangements. The Lummis bill does not contain a parallel provision, and the absence of legislative text in the PARITY Act draft reflects how technically difficult this area is to draft. If this provision moves forward, the definitions will matter enormously for anyone involved in derivatives or structured positions referencing digital assets.

Practical Steps to Take Now

Nothing in the PARITY Act is effective until Congress passes it and the President signs it. With that caveat clearly in place, there are still things worth doing today.

Review Your Loss-Harvesting Strategy

If wash sale rules are extended to crypto as expected, the ability to harvest losses and immediately repurchase will end. Consider whether any planned trades make more sense to execute before legislation is finalised. Get advice from a qualified tax professional before acting, especially given the uncertainty around effective dates.

Document Your Staking and Mining Activity

Regardless of how the staking deferral election ultimately works, you'll need clean records: dates of receipt, fair market values at receipt, and the nature of the staking arrangement (passive protocol-level vs. active). Those records are necessary under today's rules and will remain necessary under any new regime.

Understand That DeFi Tax Treatment Remains Unsettled

The PARITY Act touches on mining and staking but doesn't fully resolve the broader question of how DeFi rewards are taxed across liquidity provision, yield farming, and lending protocols. The existing IRS framework treats receipt of tokens as income events in most scenarios, and that remains the operative standard until Congress acts. Anyone with significant DeFi exposure should not wait for legislation to get their records in order.

Source: BDO Insights