- IRS begins to furlough staff, plans to furlough nearly half of agency
- 2025-2026 Priority Guidance Plan
- Guidance on CAMT, spin-offs and interest capitalization
- October 1 Senate Finance Committee hearing on digital asset taxation
- Tax policy personnel
Appropriations Showdown
The Federal government shutdown is continuing with no end in sight. The main sticking points are whether the funding bill should include the expiring increased tax credits for Affordable Care Act health insurance premiums enacted during Covid, reverse health policy changes enacted in the OBBBA, and prevent President Trump from using his statutory rescissions authority to eliminate spending previously agreed to under bipartisan spending deals.
The IRS announced on October 8 that the agency would begin an IRS-wide furlough for everyone except already-identified excepted and exempt employees. Bloomberg Tax reported that the IRS is furloughing nearly half of its workforce beginning Wednesday, October 8, 2025. The IRS is retaining employees working on the multi-trillion dollar tax law implementation, filing season, and IT.
In the days prior to the shutdown, Treasury and the IRS issued the 2025-2026 Priority Guidance Plan, and several pieces of tax guidance.
2025-2026 Priority Guidance Plan
On September 30, Treasury and the IRS issued the 2025-2026 Priority Guidance Plan. More specifically, the guidance was issued in a joint statement by Ken Kies, in his capacities as Assistant Secretary for Tax Policy and Acting IRS Chief Counsel, and Scott Bessent, in his capacity as Acting Commissioner of the IRS.
The plan lists 105 items, compared to the prior plan, which contained 231 items. As previewed by Deputy Assistant Secretary Kevn Salinger, the list is pared down to contain only items actually expected to be released this year, instead of the prior practice of including more aspirational items.
The plan is organized around Trump administration priorities: “OBBBA Implementation,” “Deregulation and Burden Reduction,” “Section 501(c)(3) Issues,” “Tribal Tax Issues,” “Digital Assets,” and “Secure 2.0 Act and Other Guidance.” Priority guidance plans under the Biden administration were organized by subject area, such as “Consolidated Returns,” “Corporations and Their Shareholders,” “Employee Benefits,” etc. During the first Trump administration, the plans contained both elements, with the opening sections organized around administration priorities, followed by a section called “General Guidance” organized by subject area.
“OBBBA Implementation” has 40 items: “Deregulation and Burden Reduction” contains 46 items. Of note, the two 501(c)(3) Issues are (1) “application of the fundamental public policy against racial discrimination, including consideration of recent caselaw, in determining the eligibility of private schools for recognition of tax-exempt status under §501(c)(3)” and (2) the Johnson Amendment. More details on the Johnson Amendment are provided in Sullivan & Cromwell’s memo “Revisiting the Johnson Amendment – ‘Electoral Politics Viewed Through the Lens of Religious Faith’.”
IRS Comments on Tips and Overtime
The IRS said employers that make a good faith effort to report tips and overtime pay for 2025 will not be subject to penalties even if the reporting is imperfect under guidance that the government is currently writing. This is according to Paul Ferrell, Senior Adviser to the IRS Director of National Public Liaison, speaking on a monthly call with the payroll industry on October 2. As noted in this S&C memo, the government released proposed regulations listing occupations that qualify for the OBBBA provision on qualified tips. The IRS previously announced that it would not update the W-2 for tax year 2025 to take into account OBBBA changes. Draft forms for tax year 2026 have contained changes to reflect the OBBBA. The two OBBBA provisions are included in the 2025-2026 Priority Guidance Plan released on September 30, 2025.
Spin-offs and Reorganizations
On September 29, 2025, Treasury and the IRS withdrew prior guidance on certain aspects of corporate spin-offs and other reorganizations. The September 29 withdrawal removed two sets of proposed regulations published on January 16, 2025. Relatedly, the same day the government also released Revenue Procedure 2025-30, which supersedes Rev. Proc. 2024-24, modifies Rev. Proc. 2025-1 and Rev. Proc. 2017-52, and revokes Notice 2024-38.
More details on the September 29 guidance are provided in Sullivan & Cromwell’s memo “IRS Withdraws Proposed Regulations on Spin-Off Transactions and Reorganizations.” The prior guidance was described in S&C’s memo, “IRS Issues Proposed Regulations on Spin-Off Transactions and Reorganizations.”
CAMT Guidance
On September 30, Treasury and the IRS issued Notice 2025-46 and Notice 2025-49, two pieces of guidance on the corporate alternative minimum book tax (“CAMT”) enacted as Section 10101 of the Inflation Reduction Act. A more detailed discussion on such guidance is provided in Sullivan & Cromwell’s memo, “IRS Issues Interim Guidance on Corporate Alternative Minimum Tax.”
Final Regulations on Interest Capitalization Rules
On October 2, Treasury and the IRS released final regulations on the interest capitalization rules.
The regulations remove the associated property rule and similar rules regarding the requirements for improvements that constitute designated property. The regulations also modify the definition of “improvement” and modify other rules to take into account the removal of the associated property rule.
The regulations largely adopt proposed regulations issued on May 15, 2025, with only minor, clarifying changes.
The regulations are effective October 2, 2025, the day they were published in the Federal Register.
Senate Finance Committee Hearing on Digital Assets
The Senate Finance Committee held a hearing, “Examining the Taxation of Digital Assets,” on October 1, 2025. The Committee hosted a panel of four witnesses: two industry representatives, Jason Somensatto, Director of Policy at Coin Center, and Lawrence Zlatkin, Vice President, Tax, of Coinbase; a tax lawyer, Andrea S. Kramer, Founding Member of ASKramer Law LLC; and a CPA, Annette Nellen, Chair, Digital Assets Tax Task Force, AICPA. The panel urged Congress to provide greater clarity on the tax treatment of digital assets, and generally focused on three issues.
First, whether there should be a de minimis exception from gain or loss recognition when using digital currency to make purchases. Proponents of a de minimis exception call this: “you shouldn’t need a tax accountant to buy a cup of coffee.” Under current rules, when the holder of a digital asset uses the asset to make a purchase, they are deemed to sell the asset, which triggers recognition of gain or loss. Treating small-dollar transactions as sales for tax purposes can be a considerable recordkeeping and reporting burden. For this reason, some of the witnesses generally endorsed a de minimis exception. However, Ms. Kramer noted that taxpayers would still have to track transactions to know whether they are below the de minimis level. The witnesses compared the de minimis exception to the existing exception under section 988(e), which addresses transactions in foreign currencies.
Second, the tax treatment of staking rewards (also called block rewards or mining awards). Some blockchain currencies rely on parties to stake (or lock up) some amount of cryptocurrency to validate transactions. This process helps prevent fraud and supports the decentralized nature of the blockchain. In exchange, “stakers” receive new crypto from each transaction validated, called a staking reward. The IRS has published guidance under Rev. Rul. 2023-14, which treats staking rewards as income upon receipt. Staking usually involves “locking up” some amount of cryptocurrency to validate transactions. Thus, stakers may not have the ability to sell their newly acquired asset. Critics of the IRS rule state that this creates “dry income” and might encourage stakers to move to more tax-friendly jurisdictions. Some witnesses called for the reversal of Rev. Rul. 2023-14 and capital gains treatment for block rewards, with gain recognition triggered only upon disposition of the asset. Ms. Kramer argued that the block rewards constitute compensation from a third party that should be treated as taxable income.
Third, the reporting requirements for digital asset transactions of more than $10,000 in value. The Infrastructure and Jobs Act of 2021 applied the section 6050I rule for reporting transactions of cash in excess of $10,000 to digital assets. Some witnesses argued that because cryptocurrency is a decentralized financial system where counterparties may have limited to no access to the identity of the payor, the reporting rules should not apply or at least should apply at a higher threshold.
There was a general bipartisan consensus at the hearing on the need to develop appropriate legislation for the taxation of digital assets, but disagreement as to what that means. Republican Senators generally agreed that new taxpayer-friendly tax legislation would lead to increased innovation, while Democratic Senators criticized these proposals as providing advantageous tax treatment and circumventing rules in place to detect money laundering.
Chairman Mike Crapo (R - ID) asked Mr. Zlatkin about parity of legal treatment between crypto and traditional finance. Mr. Zlatkin stated that crypto currency must be placed on an even playing field with traditional finance and the most durable way to accomplish that is through legislation, not agency guidance.
In response to a question from Senator Daines (R - MT), Mr. Somensatto said the tax treatment of staking rewards is the most problematic aspect of current law. Mr. Zlatkin stated that sourcing rules for staking rewards also encourage foreign investors to remain overseas. Senator Todd Young (R - IN) confirmed with Mr. Somensatto his position that the IRS should rescind the guidance in Rev. Rul. 2023-14. Senator Young also confirmed with Mr. Zlatkin his position that the retraction of Rev. Rul. 2023-14 would attract mining activity to the United States. Senator Bill Cassidy (R - LA) sought the witnesses’ opinions on addressing the usage of the blockchain to monetize patients’ health data.
Democratic Senators expressed skepticism about the changes proposed by the witnesses. Ranking Member Ron Wyden’s (D - OR) questions to Ms. Kramer indicated skepticism towards the de minimis exception and the character of staking rewards. De minimis exceptions, it seemed to him, would require the same amount of recordkeeping as the current regime requires to prove taxpayers complied with the exception. Ms. Kramer agreed.
Senator Elizabeth Warren (D - MA) criticized digital asset lobbyists for seeking special favorable tax treatment not applicable to other types of assets. Senator Warren stated that the de minimis exception proposal would cost the government $5.8 billion, and the staking reward proposal would cost $4.3 billion. Furthermore, she stated there is no good reason to exempt the digital assets industry from reporting requirements for transactions in excess of $10,000. Senators Maggie Hassan (D - NH) and Tina Smith (D - MN) echoed Senator Warren’s concerns. Senator Whitehouse (D - RI) criticized the digital asset industry for placing higher demands on energy grids, increasing energy costs for average Americans, expanding the use of fossil fuels, and supporting President Trump’s efforts to eliminate tax incentives for green energy. Senator Wyden associated himself with those remarks.
Some of the witnesses advocated on behalf of provisions in S. 2207 (introduced by Senator Cynthia Lummis (R - WY)), which would, amongst other provisions, create a $300 threshold under which any gain or loss from the sale of digital assets would be excluded from gross income up to an annual $5,000 cap, and also exclude staking rewards from income until sale or disposition.
On the House side, Rep. Max Miller (R - OH) is working on a bill addressing the taxation of digital assets, with highlights listed in this S&C memo. The Oversight Subcommittee of the Committee on Ways and Means held a hearing on “Making America the Crypto Capital of the World: Ensuring Digital Asset Policy Built for the 21st Century” on July 16.
Tax policy Personnel
The Senate Finance Committee held a hearing on Wednesday during which it voted to advance three Treasury nominees: Sullivan & Cromwell’s Don Korb to be Chief Counsel of the IRS, Derek Therurer to be a Deputy Undersecretary and Assistant Secretary for Legislative Affairs, and Jonathan Greenstein to be a Deputy Undersecretary of Treasury for International Finance. The votes were all along party lines, except that Senator Whitehouse (D - RI) voted in favor of Korb. Treasury announced on Tuesday that Theurer, who has been serving as Counselor, will perform the duties of Deputy Treasury Secretary.