What Are Digital Assets and How Are They Taxed?

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The information in this article is up to date for tax year 2023 (returns filed in 2024).

With the rise of cryptocurrencies, NFTs, and widespread digital infrastructure, more and more people are gaining and trading value through their digital assets. 

But what exactly are digital assets? And more importantly, how are they taxed?

We break it all down below.

What is a digital asset?

The IRS defines a digital asset as a “digital representation of value recorded on a cryptographically secured distributed ledger or similar technology.” 

In simpler terms, a digital asset is an item that is created and stored digitally, has value and established ownership, and is discoverable—or stored somewhere that it can be found.

Examples of digital assets

Examples of digital assets include

• Convertible virtual currency and cryptocurrency
• Stablecoins
• Non-Fungible Tokens (NFTs)
• Digital collectibles like virtual items or accessories in a video game
• Other digital items of value like photos, documents, content, email accounts, etc.

Digital assets are not real currency (i.e., fiat) because they aren’t physical coins or paper money or digitally issued by the government’s central bank. However, they can be sold, traded, and exchanged for real-world value.

Are digital assets taxable?

Yes. Digital assets are not considered currency, but the value they generate is considered taxable income or capital gain. 

How are digital assets taxed?

On your 2023 federal tax return, you must answer “Yes” or “No” to a digital asset question:

At any time during 2023, did you: (a) receive (as a reward, award, or payment for property or services); or (b) sell, exchange, or otherwise dispose of a digital asset (or a financial interest in a digital asset)?

This means that if you buy, sell, or exchange digital assets, the capital loss or gain must be reported on your tax return. Additionally, if you receive digital assets as payment for services as an employee, this is considered wages and must be reported by your employer on Form W-2, Wage and Tax Statement, like traditional wages. 

If you didn’t own any digital assets or only owned digital assets and didn’t have any digital asset transactions during the year, you can answer “No” to this question.

What digital asset transactions must be reported?

So what do you need to report? The IRS lists several digital asset transactions that must be reported on your tax return:

• Received digital assets as payment for property or services provided
• Received digital assets resulting from a reward or award
• Received new digital assets resulting from mining, staking, and similar activities
• Received digital assets resulting from a hard fork
• Disposed of digital assets in exchange for property or services
• Disposed of a digital asset in exchange or trade for another digital asset
• Sold a digital asset

What forms to use to report digital assets

There are different tax forms to report your digital assets, but generally you’ll report digital assets on the same forms you would use to report other property. 

Which forms you use depends on the type of transaction. 

Form 1040, U.S. Individual Income Tax Return

Use Form 1040 or 1040-SR, U.S. Tax Return for Seniors for any ordinary income you receive from digital assets (i.e. employee wages).

Form 1040 (Schedule C), Profit or Loss from Business (Sole Proprietorship)

Report non-employee compensation for services on Schedule C. Additionally, use this form if you sold, exchanged or otherwise disposed of digital assets to customers.

Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return

Use Form 709 to report any gifts you gave in the form of digital assets. 

Form 1040 (Schedule 1), Additional Income and Adjustments to Income

Use Schedule 1 to report any other ordinary income, such as from forks, staking, mining, etc.

Keep records of your digital asset transactions

The IRS requires taxpayers to maintain sufficient records to validate the positions taken in their tax returns. If you have digital assets, be sure to keep clear records of your transactions to ensure accurate reporting come tax season.

You’ll need to document: 

• The purchase, receipt, sale, exchange, or any other disposition of your digital assets
• The fair market value (in U.S. dollars) of all digital assets received as income or as a payment in the ordinary course of a trade or business

Understanding your digital assets and any taxes you may owe on them can get complicated fast. Get help filing your taxes with ezTaxReturn.

The articles and content published on this blog are provided for informational purposes only. The information presented is not intended to be, and should not be taken as, legal, financial, or professional advice. Readers are advised to seek appropriate professional guidance and conduct their own due diligence before making any decisions based on the information provided.