If you own digital assets, or you are just interested, it is a good idea to understand how the Internal Revenue Service (IRS) looks at this type of property.
The IRS considers digital assets as they would property—meaning the rules around property transactions also refer to digital items. Even as the value of digital property continues to swing wildly at times, the regulatory environment around it is becoming slightly more stable.
The IRS distinguishes between types of digital assets and does not consider any of them to be hard currency—the type of which is controlled and issued by the government of this or other countries. Types of digital assets can be used as a substitute for real currency or used transactionally in the payment of goods and services. Other types, like non-fungible tokens (NFTs) can be traded or sold. Examples include:
- Virtual currency carries or stores value other than real currency.
- NFTs are unique and carry a digital signature. An NFT can be an image and a digital asset, and can also attach to an asset, such as a song or work of art.
- Crypto or “cryptocurrency” is a variety of virtual currency that is cryptographically (in code) maintained on a distributed ledger. Users can exchange and use crypto with or without a crypto exchange. Crypto exchanges get a lot of press when one flames out, such as the FTX meltdown which led the CEO of the exchange to a conviction on federal fraud charges.
Taxing digital assets
As we said earlier, digital assets are considered property by the IRS. Wherever there is property, there is probably income in which the IRS has an interest. Sales, exchanges, and earnings involving digital assets are taxable.
Types of transactions that result in taxable income include:
- The exchange of digital assets for goods, services, or other property, including the exchange or trade of one digital asset for another can result in taxable income.
- The sale of a digital asset for fiat or real currency, or any other action that trades or buys out the value of a digital asset is taxable.
- When you receive a digital asset in payment, airdrop (depositing a crypto token in the wallet of another), hard fork (splitting a single crypto coin), or mining activity, it will likely result in taxable income.
Digital transactions are reported with the same forms used for other property transactions and the IRS requires you to maintain records of those transactions for at least three years. For digital transactions that are not taxable, like gifts, donations, or transactions between your accounts or wallet, it is also a good idea to keep receipts, and records in the event you are audited.
With more interest in virtual currencies, there is greater scrutiny of transactions involving crypto and other digital assets. If you have concerns about your portfolio or digital transactions, speak with an experienced tax attorney for options.
Experienced legal representation on questions involving taxation of digital assets, tax controversy, or compliance issues
if you are challenged by a tax controversy in Cleveland, Chicago, or elsewhere, the tax attorneys at Robert J. Fedor, Esq., LLC can help. We deliver experienced tax guidance and seasoned criminal tax defense. Call us at 800-579-0997 or contact us online.
