For federal tax purposes, digital assets are treated as property. General tax principles applicable to property transactions apply to transactions using digital assets. You may be required to report your digital asset activity on your tax return.
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Definition of Digital Assets
Digital assets are broadly defined as any digital representation of value which is recorded on a cryptographically secured distributed ledger or any similar technology as specified by the Secretary.
Digital assets include (but are not limited to):
- Convertible virtual currency and cryptocurrency
- Non-fungible tokens (NFTs)
Digital assets are not real currency (also known as “fiat”) because they are not the coin and paper money of the United States or a foreign country and are not digitally issued by a government’s central bank.
A digital asset that has an equivalent value in real currency, or acts as a substitute for real currency, has been referred to as convertible virtual currency.
A cryptocurrency is an example of a convertible virtual currency that can be used as payment for goods and services, digitally traded between users, and exchanged for or into real currencies or digital assets.
Transactions involving a digital asset are generally required to be reported on a tax return.
Taxable income, gain or loss may result from transactions including, but not limited to:
- Sale of a digital asset for fiat
- Exchange of a digital asset for property, goods, or services
- Exchange or trade of one digital asset for another digital asset
- Receipt of a digital asset as payment for goods or services
- Receipt of a new digital asset as a result of a hard fork
- Receipt of a new digital asset as a result of mining or staking activities
- Receipt of a digital asset as a result of an airdrop
- Any other disposition of a financial interest in a digital asset Note: the transfer of property, including a digital asset, as a bona fide gift, requires the filing of Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return if the fair market value of the property, at the time of the transfer, exceeds the donor’s annual gift exclusion amount available at the time of the transfer.
Guidance and Publications
For more information regarding the general tax principles that apply to digital assets, you can also refer to the following materials:
- The proposed section 6045 regulations, which are open for public comment and feedback until October 30, would require brokers of digital assets to report certain sales and exchanges. The proposed regulations would clarify and adjust the rules regarding the tax reporting of information by brokers, so that brokers for digital assets are subject to the same information reporting rules as brokers for securities and other financial instruments. Under current law, taxpayers owe tax on gains and may be entitled to deduct losses on digital assets when sold, but for many taxpayers it is difficult and costly to calculate their gains. These proposed rules require brokers to provide a new Form 1099-DA to help taxpayers determine if they owe taxes, and would help taxpayers avoid having to make complicated calculations or pay digital asset tax preparation services in order to file their tax returns. These regulations align tax reporting on digital assets with tax reporting on other assets, and, as a result, avoid preferential treatment between different types of assets. Under the proposed rules, the first year that brokers would be required to report any information on sales and exchanges of digital assets is in 2026, for sales and exchanges in 2025.
- IRS Notice 2014-21, as modified by Notice 2023-34, guides individuals and businesses on the tax treatment of transactions using convertible virtual currencies. For federal tax purposes, virtual currency is treated as property. General tax principles applicable to property transactions apply to transactions using virtual currency.
- IRS Notice 2023-27PDF provides guidance on the tax treatment of non-fungible tokens (NFTs).
- Frequently Asked Questions on Virtual Currency Transactions expand upon the examples provided in Notice 2014-21 and apply those same longstanding tax principles to additional situations.
- Revenue Ruling 2019-24 addresses the tax implications of a hard fork.
- Revenue Ruling 2023-14PDF addresses whether a cash-method taxpayer that receives additional units of cryptocurrency from staking must include those rewards in gross income.
- Chief Counsel Advice (CCA) 202035011PDF – Describes the tax consequences of receiving convertible virtual currency as payment for performing microtasks through a crowdsourcing platform.
- Chief Counsel Advice (CCA) 202114020PDF – Addresses the receipt of Bitcoin Cash as a result of the hard fork.
- Chief Counsel Advice (CCA) 202124008PDF – Describes the applicability of Internal Revenue Code Section 1031 to exchanges of Bitcoin for Ether, Bitcoin for Litecoin, and Ether for Litecoin.
- Chief Counsel Advice (CCA) 202302011PDF – Addresses the applicability of IRC section 165 to cryptocurrency that has declined in value.
- Chief Counsel Advice (CCA) 202302012PDF – Addresses the qualified appraisal requirement for charitable contributions of cryptocurrency.
- Chief Counsel Advice (CCA) 202316008PDF – Describes the tax consequences to an individual who holds a cryptocurrency that undergoes a protocol upgrade.
- Private Letter Ruling 202019028PDF – Addressed certain issues related to the tax-exempt status of entities in the digital asset industry.
- FinCEN Notice 2020-2PDF – provides guidance on Report of Foreign Bank and Financial Accounts (FBAR) reporting requirements related to virtual currency.
- Taxable and Nontaxable Income, Publication 525 – for more information on miscellaneous income from exchanges involving property or services.
- Charitable Contributions, Publication 526 – for more information on charitable contribution deductions.
- Sales and Other Dispositions of Assets, Publication 544 – for more information about capital assets and the character of gain or loss.
- Basis of Assets, Publication 551 – for more information on the computation of basis.
- Determining the Value of Donated Property, Publication 561 – for more information on the appraisal of donated property worth more than $5,000.