Digital assets include (but are not limited to):

  • Convertible virtual currency and cryptocurrency
  • Stablecoins
  • Non-fungible tokens (NFTs)

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.

Cryptocurrency

The first page of the draft Form 1040 for 2022 asks the following revised cryptocurrency question: “At any time during 2022, did you (a) receive (as a reward, award, or compensation); or (b) sell, exchange, gift, or otherwise dispose of a digital asset (or a financial interest in a digital asset)?”

When the IRS places a question about an asset on the first page of Form 1040, you know it’s a high-priority item.

You can expect increased IRS audits dealing with cryptocurrency transactions. If you’re one of the millions of Americans who engage in such transactions, it’s important to keep good records and report any income you earn.

In 2014, the IRS issued Notice 2014-21, 2014-16 I.R.B. 938 PDF, explaining that virtual currency is treated as property for Federal income tax purposes and providing examples of how longstanding tax principles applicable to transactions involving property apply to virtual currency.  The frequently asked questions (“FAQs”) listed here expand upon the examples provided in Notice 2014-21 and apply those same longstanding tax principles to additional situations.

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.

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
  • Stablecoins
  • 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.

Tax Consequences

Transactions involving a digital asset are generally required to be reported on a tax return.

Taxable 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
  • Receipt or transfer of a digital asset for free (without providing any consideration) that does not qualify as a bona fide gift
  • Transferring a digital asset as a bona fide gift if the donor exceeds the annual gift exclusion amount

Guidance and Publications

For more information regarding the general tax principles that apply to digital assets, you can also refer to the following materials:

IRS Guidance

  • IRS Notice 2014-21 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.
  • 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 PDF addresses the tax implications of a hard fork.

 

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Want to know more?  Have some tax questions of your own?  Get in touch with us and we’ll guide you thru the tax and accounting process.

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