Spouses, taxes and crypto: The unanswered questions for Congress' stock trading ban

Wait, isn’t insider trading already banned?

Following a “60 Minutes” expose of trades lawmakers made during the 2008 financial crisis, Congress in 2012 passed the Stop Trading on Congressional Knowledge Act. The law requires members and their spouses to disclose stock transactions and bars them from trading on nonpublic information “derived” from their official positions.

But there are a few problems with the existing rules, according to critics. For one thing, enforcement of the law has been spotty at best, and the penalties for failing to disclose trades are puny, starting at $200.

There’s also the problem of separating out the information members of Congress come across each day to determine whether it’s “derived” from their positions, said Tyler Gellasch, a former Senate staffer who helped draft the STOCK Act.

“Members of Congress just have way too much access to way too much information,” he said.

How would a ban work?

Proposals backed by Sen. Jon Osoff (D-Ga.), Rep. Alexandria Ocasio Cortez (DN.Y.) and others would require members to either divest or place their assets in blind trusts run by third parties, restricting the ability of lawmakers to trade day to day.

But government watchdogs warn that blind trusts wouldn’t do enough to combat corruption.

“Removal or ignorance of how your decisions might be affecting your financial interests is not complete when you’re dealing with a trust, because you know what went into it,” said Eleanor Eagan, a research assistant at the Revolving Door Project, which scrutinizes corporate influence.

Craig Holman, government affairs lobbyist for Public Citizen, said he is pushing members to require assets to be transferred into diversified mutual funds — the same way that many Americans invest for retirement.

Blind trusts “are not blind whatsoever,” he said.

“They do lose control over the investments, but at the end of the year they have to be notified of where the assets are” for disclosure purposes, he said. “So if you’ve got all your investments in coal, you might be inclined to act in a certain way on climate change legislation.”

From a political perspective, the blind trust requirement appears to be the path of least resistance.

“We want something that can pass,” said a Senate aide to a Democrat sponsoring one of the bills. “It’d be hard to pass a bill to require every single member of Congress to sell off every single piece of stock they have.”

Would members take a tax hit or get a tax break if they’re forced to sell stocks?

Most of the bills that have been introduced do not address the tax treatment of assets. For lawmakers and would-be lawmakers with millions of dollars of holdings, the tax ramifications could be massive.

Being required to sell well-performing stock and then getting hit with a hefty tax bill to boot could be enough to make some wealthy individuals decide against running for office.

On the other hand, a tax break permitted by a capital gains waiver — one way to address the tax question — could be a big financial windfall for someone with significant holdings.

The proposal from Sens. Elizabeth Warren (D-Mass.) and Steve Daines (R-Mont.) includes a provision that would allow members and spouses who are forced to divest to defer taxation on the gains of those investments.

What transactions would be covered?

Nearly all proponents of a ban agree that the trading of individual stocks and commodities should be prohibited. But it’s unclear what would happen to lawmakers’ holdings in cryptocurrency, for example, or real estate.

McHenry, who opposes a ban, lamented restricting lawmakers from using crypto, as Congress debates how to regulate the new market. McHenry is the top Republican on the House Financial Services Committee, which oversees financial trading regulations.

“It’s a terrible idea to remove lawmakers from society, generally speaking,” he said in an interview. “It would be more interesting if lawmakers owned digital assets than if they remove themselves from financial markets.”

Who would the ban apply to?

One of the thorniest issues ahead of lawmakers is deciding who would be prohibited from trading, including how far it reaches across government and into policymakers’ families.

Good-government groups expect coverage of spouses to be one of the trickiest for members. Inclusion of spouses could open the door to carve-outs, such as allowing spouses to trade if they use money outside a joint account.

The Warren-Daines bill, for instance, covers spouses but exempts assets received as compensations for a spouse’s job and spouses whose primary occupation is to trade assets for clients.

So far, lawmakers seem “quite willing to include spouses,” Holman said. “But clearly when it goes over to the House and [Speaker] Nancy Pelosi has to work with this, she’s got a very personal family problem with that.” Pelosi’s husband, Paul, is an investor who regularly makes significant stock trades.

Pelosi has said any prohibition would need to be “government-wide” and cover the judiciary as well as Congress. A bill from Sen. Kirsten Gillibrand (DN.Y.) and Rep. Katie Porter (D-Calif.) would expand the STOCK Act to cover the federal judiciary and the Federal Reserve. The bill from Ossoff and Sen. Mark Kelly (D-Ariz.) would apply to members of Congress and their spouses and dependent children.

A bill from Sen. Sherrod Brown (D-Ohio) and Ocasio-Cortez would apply to lawmakers’ senior staff but not their spouses. But one co-sponsor, Rep. Raja Krishnamoorthi (D-Ill.) said that could change.

“We are more than willing to entertain” barring spouses through an amendment, he said at a Thursday press conference. “A lot of us would support it. But right now, we want this thing to move.”

Who would enforce the ban? What are the penalties?

Lawmakers are still debating who would be responsible for enforcing the ban. The Warren-Daines bill would have the Justice Department and the Office of Special Counsel police lawmakers. The Ossoff-Kelly and Brown-Ocasio-Cortez proposals would leave enforcement to congressional ethics committees — a possibility that government watchdogs aren’t enthusiastic about.

“A law is only as strong as its enforcement,” Eagan said. “So certainly it would be good to see it referred to DOJ or some outside party so there’s not this issue of self enforcement.”

The head of the Securities and Exchange Commission is also expecting to play a role.

“The drafts that I’ve been told about would probably still have the SEC involved,” SEC Chair Gary Gensler told reporters Wednesday.

The Senate proposals take a different approach to penalties. Warren’s bill would fine violators up to $50,000 for each infraction. Ossoff’s bill would impose a fine equal to a year of an individual’s congressional salary — currently about $174,000 per year. Brown’s bill would require violators to pay a civil penalty worth no less than 10 percent of the improperly traded investment.

Zach Warmbrodt contributed to this report.