Digital assets have become increasingly common, and the IRS continues to emphasize that transactions involving these assets may have federal tax consequences. Taxpayers must report all taxable income from digital-asset transactions, even if they do not receive a tax form from an exchange, broker, or other payor.
What Is a Digital Asset?
For federal tax purposes, a digital asset is generally treated as property rather than currency. Common examples include:
- Convertible virtual currency and cryptocurrency, such as Bitcoin or Ethereum;
- Stablecoins;
- Non-fungible tokens, commonly known as NFTs; and
- Rewards earned through staking, mining, “earn” programs, or similar activities.
How Are Digital-Asset Transactions Taxed?
The tax treatment depends on how the digital asset was acquired and used.
Digital assets held for investment are generally treated as capital assets. When they are sold, exchanged, or used to purchase something, the taxpayer must calculate a capital gain or loss based on the difference between the asset’s cost basis and its fair market value at the time of disposition. These transactions are generally reported on Form 8949 and Schedule D.
Digital assets received as compensation, staking rewards, mining income, or business revenue may be taxable as ordinary income. The amount reported is generally based on the asset’s fair market value in U.S. dollars when the taxpayer receives or gains control of it. Depending on the circumstances, the income may be reported on Schedule 1, Schedule C, or the applicable business return.
A later sale or exchange of the same asset may create a second taxable event. The value previously reported as income will generally become part of the taxpayer’s basis when calculating the subsequent gain or loss.
Do Not Rely Solely on Tax Forms
Taxpayers must report taxable digital-asset activity even if they do not receive Form 1099-DA or another information return. Exchanges may not report every transaction, and information reported by a platform may not include the taxpayer’s complete cost basis.
The absence of a tax form does not eliminate the taxpayer’s reporting responsibility.
Maintain Complete Records
Anyone who owns or transacts in digital assets should maintain detailed records showing:
- The type and number of digital-asset units;
- The date and time each asset was acquired;
- The asset’s fair market value in U.S. dollars when acquired;
- The cost or other basis of the asset;
- The date and time of each sale, exchange, payment, or other disposition;
- The fair market value and proceeds at the time of disposition;
- Transaction fees; and
- Records of transfers between personally owned wallets and accounts.
Because digital-asset platforms may not retain information indefinitely—or may report incomplete basis information—taxpayers should download transaction histories and account statements regularly.
Before Filing Your Return
Provide your tax professional with records from every exchange, wallet, staking platform, and digital-asset account used during the year. Complete information is essential to determine the proper answer to the digital-asset question and accurately calculate any taxable income, capital gain, or loss.
Digital-asset reporting can be complicated, particularly when transactions involve multiple wallets, exchanges, staking rewards, NFTs, or exchanges between different cryptocurrencies.