Crypto[1] is an extraordinary growth market with profound implications for foreign investment in the United States. The current U.S. administration has made a clear, specific, and demonstrable commitment toward development of crypto during 2025. And there is no subject that is more important in encouraging U.S. crypto market expansion than the tax framework that is needed to ensure safe harbors for foreign investment.

Safe harbors are intended to provide foreign investors with certainty as to the statutory interpretation, avoid confusion, and ensure that they do not inadvertently find themselves in a U.S. trade or business. Code[2] Section 864(b)(2)[3] provides trading safe harbors for securities and commodities. They were enacted to encourage foreign investment in the United States through a resident U.S. broker, commission agent, custodian, or other independent agent trading on behalf of non-U.S. investors. At present, there is one safe harbor for stock and securities, and another for commodities.

The Securities Safe Harbor applies to stock and securities, with securities defined as “any note, bond, debenture, or other evidence of indebtedness,” and “any evidence of an interest in or right to subscribe to or repurchase any of the items listed above.”[4]

The Commodity Safe Harbor defines “commodities” more narrowly by limiting the definition to commodities that are “of a kind” “customarily dealt in” on an “organized commodity exchange” provided the transaction is “of a kind” “customarily consummated” at “such place.[5]” The term commodity does not include goods or merchandise in the ordinary channels of commerce.

Although some digital assets are “securities,” they are more likely to be “commodities.” The need for a Digital Assets Safe Harbor is as important to foreign investors in digital assets, securities, and commodities. In short, foreign investors need certainty as to how U.S. tax laws can apply to them.

Code Section 864(b)(2)(B)(iii): why it matters!

The legislative history does not provide any insights into why Congress chose to define a “commodity” as narrowly as it did in the Commodity Safe Harbor provision. Such a restrictive definition makes no more sense for digital assets than it does for commodities generally. Arguably, the only digital assets that definitely fall into the commodities safe harbor today are those that trade on CFTC-regulated commodity exchanges, such as BTC, ETH, SOL, and XRP.

If Congress wants the trading safe harbor to apply more broadly to digital assets, it can either amend the commodity definition in the current Commodities Safe Harbor, or it can enact a separate safe harbor for digital assets. It is difficult to squeeze digital assets into the current commodity definition, other than through a broad reading of the phrase “of a kind.”

If Congress does not choose to broaden the definition of a commodity so it still requires being “of a kind” that is dealt in on an organized commodity exchange; then crypto exchanges that trade spot contracts, centralized crypto exchanges that are not regulated by the CFTC, and decentralized platforms should all qualify as “organized commodity exchanges.”

In crafting a Digital Assets Safe Harbor, it should be broad enough to include ancillary and closely related activities. As the Securities Safe Harbor includes securities lending and interest rate hedging; at a minimum, a Digital Assets Safe Harbor should also allow for securities lending, digital asset lending, interest rate hedging, and delegated staking. Congress should also clarify whether operating a node as a validator could possibly result in a foreign investor being in a U.S. trade or business by performing personal services or making property available to a validator.

Attracting foreign investment

As I have stated earlier in this series, the United States is known for its comprehensive, high quality, and well-regulated financial markets. And, for the main part, the United States is a great place to do business.

But regulations must be understandable, reasonable, and predictable at all times. Under a “trading safe harbor,” a foreign person trading in U.S. stock, securities, or commodities is generally not taxed in the U.S. due to their trading activity. And this absolute certainty is a critically important consideration, both for the foreign investor and for the U.S. investment manager that seek to trade on behalf of foreign investors.

In short, foreign investors need to know precisely where they stand under U.S. tax laws. This is not possible when significant uncertainty remains as to whether the trading safe harbor rule applies to digital assets that are already classified as stock, securities, or commodities. And, assuming it does apply, to which digital assets does it apply.

Is the current Commodity Safe Harbor adequate for non-U.S. investors that are interested in trading digital assets in the United States? The answer to that question is an unqualified “no.”

Put simply, this is a multi-trillion-dollar problem—and, thus, it is one that needs to be resolved with some alacrity. Whether Congress decides to include digital assets in the current Commodity Safe Harbor, or it decides to create a new Digital Assets Safe Harbor, I urge Congress to amend the definition of a “commodity” to modernize the Commodity Safe Harbor for all commodities, and for the benefit of all confused taxpayers.

As I’ve discussed in other parts of this series, Congressmen Max Miller and Steven Horsford have proposed a new trading safe harbor for digital assets in a draft House Bill (Draft Bill).[6] People have been curious as to whether any new proposals will treat digital assets and transactions in a separate safe harbor or—perhaps—amend the Commodity or Securities Safe Harbor.

In the Draft Bill, the proposed trading safe harbor would be a standalone Digital Assets Safe Harbor, and it would cover trading in digital assets through a resident broker, commission agent, custodian, digital asset exchange, or other independent agent. The proposed safe harbor would apply to trading digital assets for the taxpayer’s own account even if the employee or agent has discretionary authority to make decisions in entering into digital assets.

Unfortunately, the proposed digital assets definition is limited to digital assets that are “of a kind” “customarily dealt in” on a digital commodity exchange. It is not broad enough in my judgment. At least, the definition of a digital asset exchange is defined to include “a centralized or decentralized platform which facilitates the transfer of digital assets.” The Draft Bill recognizes the need to include not just centralized platforms but also decentralized platforms that “facilitate transfers.” This definition makes perfect sense.

Many of the activities taxpayers that engage in could raise questions as to the meaning of the limitation that digital assets “must be of a kind customarily dealt in” and of a kind customarily consummated at” a digital asset exchange.

The same questions I raised about the language in the Commodity Safe Harbor apply to the proposed Digital Asset Safe Harbor. The Digital Asset Safe Harbor does include decentralized platforms in addition to centralized platforms if, but only if, the transaction is “of a kind” “customarily consummated” at “such place.”  

How we clearly define “such place” in a digital world is a big question. Is “digital” a “place”? How do we define “of a kind” when the only common link between various digital asset products is that these products are being traded digitally? These questions are hard ones to answer—and harder still to answer well.