Summary
- Likelihood of reconciliation bill increases as funding showdown continues.
- Treasury and the IRS issue Notice 2026-23: Public Recommendations Invited on Items to be Included on the 2026–2027 Priority Guidance Plan.
- Ways and Means Committee Reps. Miller and Horsford release updated crypto tax PARITY Act discussion draft.
- Committee on Ways and Means holds tax mark-up on March 25.
A reconciliation bill to fund DHS and the Iran war looks increasingly possible. Any such reconciliation would likely include tax provisions.
On Friday, Congress left for its two-week spring recess without funding DHS, for which appropriations lapsed on February 14. The day started with a 3 a.m. voice vote in the Senate, with five Senators present, to fund DHS except for ICE and CBP. Close to midnight, the House voted for a continuing resolution to fund all of DHS through May 22. On Thursday, President Trump announced he will use existing funding authorities to pay TSA employees.
The White House will also likely request $200 billion in supplemental defense appropriations for the war in the Middle East, which is unlikely to attract 60 votes in the Senate, and therefore can only be passed in a reconciliation bill under Senate procedural rules. President Trump has also been focused on legislation regarding election rules, although it seems questionable whether such legislation would meet the Senate procedural criteria for inclusion in a reconciliation bill.
The Trump administration now appears likely to release its proposed budget for Fiscal Year 2027 on April 3, which may include a request for supplemental funding for the Iran war.
Although many Republicans, including Committee on Ways and Means Chairman Smith (R-MO), voiced skepticism about a 2026 reconciliation bill, recent developments regarding DHS funding and the Iran war have made a reconciliation bill more likely. As Chairman Smith made clear, once Republicans are working on a reconciliation bill, they will want to include tax provisions.
Although it remains unclear what tax provisions might be included, much of the political conversation has centered around the cost of living. This might mean a reconciliation bill would provide temporary tax decreases targeted at low- and middle-income Americans. Republicans have also floated reconfiguring provisions that were dropped from the 2025 OBBBA because of the Senate’s procedural rules for reconciliation.
Budget Committee Chairman Arrington (R-TX) said late last week that reconciliation could include a very wide range of tax provisions, “I mean, the tax code is larger and longer than the Bible itself.” Other Ways and Means members pointedly noted that pay-fors will likely be needed if there is a reconciliation bill and that a variety of tax increases targeting perceived loopholes would be on the table.
Congressional Republicans will likely consider bringing back proposed new Tax Code section 899, which was included in the House-passed version of the OBBBA but dropped at the end of June after the G7 announced the principles of a side-by-side agreement with regards to Pillar 2, which was finalized by the OECD at the start of 2026. The Trump administration has thus far been dealing with digital services taxes (DSTs), alongside digital services regulations issues, through trade negotiations. But congressional Republicans may seek to increase pressure on foreign countries to drop DSTs through legislation such as proposed section 899. They also may pursue section 899 to make sure foreign countries implement the side-by-side agreement, or in case the U.S. does not, in the future, meet the terms of the side-by-side’s safe harbor either because U.S. law changes or the safe harbor changes.
Notice 2026-23 – Public Recommendations Invited on Items to be Included on the 2026–2027 Priority Guidance Plan
On March 23, Treasury and the IRS released Notice 2026-23 inviting public comment on items to be included in the 2026–2027 Priority Guidance Plan (PGP) of projects that the agencies intended to actively prioritize in the one-year period starting on July 1, 2026. Taxpayers should view the invitation as a significant opportunity to influence the tax regulatory agenda of a Treasury Department that has proven willing and able to make significant changes to existing guidance, especially to the extent taxpayers can align their recommendations with the administration’s tax and regulatory priorities as outlined in the notice and described below. The notice requests submissions by May 29, but notes that taxpayers may submit recommendations at any time during the year and that PGP will be updated periodically.
The notice states that in reviewing recommendations for guidance, the agencies will consider a number of factors, including whether a recommendation relates to the OBBBA; relates to regulations in section 2(a) of Executive Order 14219, Ensuring Lawful Governance and Implementing the President’s “Department of Government Efficiency” Deregulatory Initiative (regulations that raise constitutional questions, are unlawful delegations of legislative power, are not based on the best reading of the statutes, implicate the major questions doctrine, impose costs upon private parties not outweighed by public benefits, harm the national interest, or impede private enterprise and entrepreneurship); involves existing guidance that is problematic; reduces controversy and lessens burdens on taxpayers or the IRS; would be in accordance with Executive Order 14192, Unleashing Prosperity Through Deregulation, or other executive orders; resolves significant issues for a broad class of taxpayers; promotes sound tax administration; can be administered by the IRS on a uniform basis; and can be drafted in a manner taxpayers can easily understand and apply.
Reps. Miller and Horsford Release Updated Crypto “PARITY” Act Discussion Draft
On March 26, Representatives Max Miller (R-OH) and Steven Horsford (D-NV) released an updated version of the PARITY Act, their December 2025 bipartisan discussion draft (described in this S&C tax policy memo) on digital asset taxation. The draft contains significant revisions and also new legislative language operationalizing policy positions contained in the December draft. Reps. Miller and Horsford said they intend to introduce the draft as a bill this spring.
The March draft significantly changes the earlier stablecoin de minimis rule. The December draft would have added new Tax Code section 139J and treated certain sales and exchanges of regulated payment stablecoins as excluded from gross income, subject to a 12-month price-stability test and an exception if the coin traded outside $0.99 to $1.01. The March draft instead adds new Tax Code section 1034 and separates sales from exchanges. On a sale, gain or loss is generally not recognized unless basis is below 99 percent of redemption value. On an exchange, the recipient takes a deemed $1 basis. The revised draft excludes related-party transactions. Furthermore, the draft provides transaction costs that do not increase basis. The earlier draft’s $200 de minimis limitation was removed.
The March draft also revises the section 864 trading safe harbor, providing circumstances under which trading for one’s own account does not create a U.S. trade or business. The new draft contains a narrower, functional definition of “digital asset.” For this purpose, the asset cannot represent equity, debt, or similar property rights, and it cannot derive its value mainly from fiat currency, commodities, securities, or other financial instruments. The draft also more narrowly defines a digital asset exchange as a platform that holds or controls customer assets. The lending rule is narrowed in the same way. It applies only to “eligible digital assets,” meaning fungible assets with market prices that can be readily determined and that do not carry embedded ownership or creditor rights. It also treats substitute payments for staking rewards, fees, and similar items as taxable to the lender.
The March draft also revises the wash sale and mark-to-market rules. In general, the wash sale rules deny a loss if the taxpayer sells an asset and buys back a substantially identical asset within 30 days before or after the sale. The December draft applied that rule to actively traded digital assets and to a broad range of contracts and synthetic positions. The March draft applies to any “specified asset,” which includes digital assets, but drops the broader derivatives language. The mark-to-market election remains for dealers and traders. That election generally requires annual gain or loss recognition as if covered assets were sold at year end.
The March draft also turns several policy concepts from the earlier draft into legislative language. It amends section 1259 to apply the constructive sale rule to digital assets. That rule generally taxes a taxpayer who locks in gain through offsetting positions without making an actual sale. The draft modifies the mining and staking rules to differentiate between active and passive activities. Taxpayers may elect a deferral period on receipt of digital assets through passive validation activities in which case certain costs are capitalized, sales during the deferral period produce ordinary gain or loss, and later sales produce long-term capital gain or loss. For partnerships and S corporations, the election is made at the entity level.
The March draft requires a contemporaneous donee acknowledgement that must be attached to the donor’s tax return for a charitable deduction with respect to infrequently traded digital assets with a claimed value above $500. If the charity sells the asset, the donor’s deduction cannot exceed the charity’s gross sale proceeds. The draft also adds a penalty for false or fraudulent acknowledgments.
The March draft also adds into Section 7701 general definitions for “digital asset,” “actively traded digital asset,” and “staking.”
The March draft drops the provision exempting “unrealized gains and losses from investments that are marked to market for solely accounting purposes” from adjusted financial statement income under the corporate alternative minimum tax (CAMT). Notice 2025-49 generally provided such an exclusion from gains and losses on digital assets for CAMT purposes.
Ways and Means March 25 Markup
On March 25, the House Committee on Ways and Means met to markup five tax bills: H.R. 2347, the “Survivor Justice Tax Prevention Act”; H.R. 5366, the “Federal Disaster Tax Relief Act of 2025”; H.R. 5334, the “Supporting Early Childhood Educators’ Deductions Act of 2025”; H.R. 7971, the “Taxpayer Experience Improvement Act”; and H.R. 7959, the “IRS Whistleblower Program Improvement Act.” The Committee voted unanimously to favorably report all five bills (each as amended by an Amendment in the Nature of a Substitute (AINS) offered by Chairman Smith) to the House of Representatives.
H.R. 2347 would exclude from taxable income most compensatory damages received because of sexual acts or sexual contact, treating them similarly to damages for physical injuries (while punitive damages remain taxable). Qualifying for the tax exclusion would be satisfied by providing proof of judgment or a settlement agreement, and denial based solely on lack of medical records would be prohibited. The bill would generally apply prospectively to new decisions and settlements after the date of enactment and directs Treasury to run a public awareness campaign about the new tax treatment.
The bill is sponsored by Rep. Lloyd Smucker (R-PA) and cosponsored by Rep. Gwen Moore (D-WI). The Joint Committee on Taxation (JCT) estimated the bill would decrease revenue by $89 million over the 2026–2036 budget window.
H.R. 5366 would expand and make permanent more generous tax deductions for personal casualty losses from federally declared disasters, including allowing broader deductions and integrating them into the standard deduction. It would lower certain deduction thresholds and adjust rules (including the AMT) to make it easier for taxpayers to claim disaster-related losses, for disasters occurring after December 28, 2019, and before January 1, 2027. Finally, the bill would exclude from taxable income certain compensation for wildfire-related losses (e.g., property damage, living expenses, emotional distress) received after December 31, 2025, and before January 1, 2031.
The bill is sponsored by Rep. W. Gregory Steube (R-FL) and cosponsored by Rep. Mike Thompson (D-CA), both of whose districts have been the sites of recent natural disasters. The bill’s short title was amended to honor the late Representative, Doug LaMalfa. JCT estimated the bill would decrease revenue by $408 million over the 2026–2036 budget window.
H.R. 5334 would expand the existing educator expense deduction to include early childhood educators, who were previously excluded. It would allow pre-kindergarten and similar educators to deduct out-of-pocket classroom expenses (for example, supplies and materials) on the same terms as K–12 teachers. Educators may claim up to $350 as an above-the-line deduction and may itemize qualifying additional expenses. The bill would be effective for expenses incurred in taxable years beginning after December 31, 2024.
The bill is sponsored by Rep. Jimmy Panetta (D-CA) and Rep. Brian Fitzpatrick (R-PA). At the markup, an amendment in the nature of a substitute was introduced and approved, which broadened the definition of what would qualify as a school for the purpose of the rule. JCT estimated the bill would decrease revenue by $648 million over the 2026–2036 budget window.
H.R. 7971 would require the IRS to modernize taxpayer-facing services, including a real-time dashboard showing call wait times, backlog status, and service availability. It would expand digital access by mandating online and mobile tools that provide individualized, up-to-date information on returns and refunds, including processing status, delays, and expected payment details. The bill would also direct the IRS to improve customer service infrastructure, such as universal callback options and robust online accounts, which would allow taxpayers and authorized representatives to view documents, respond electronically, and manage interactions more efficiently.
The bill is sponsored by Rep. David Schweikert (R-AZ) and cosponsored by Rep. Don Beyer (D-VA). JCT estimated that the bill would have no revenue effect over the 2025–2036 budget window.
H.R. 7959 would strengthen the IRS whistleblower program, including changing Tax Court review of award determinations to a de novo standard with a broader evidentiary scope. It would enhance protections and incentives by allowing whistleblowers to proceed anonymously in Tax Court, requiring interest on delayed awards, and improving transparency through expanded IRS reporting on whistleblower activity. The bill would also clarify tax treatment of whistleblower awards, such as permitting deductions for attorney’s fees.
The bill is sponsored by Rep. Mike Kelly (R-PA) and cosponsored by Rep. Mike Thompson (D-CA). JCT estimated the bill would decrease revenue by $44 million over the 2026–2036 budget window.
The latter two bills are similar to provisions in S. 3931, the Taxpayer Assistance and Service Act, which was introduced by Senate Finance Committee Chairman Senator Crapo (R-ID) and Ranking Member Wyden (D-OR) on February 26.