Taxation Of Cryptocurrency Transactions

Digital Assets and Tax Reporting: What You Need to Know

Introduction

The Internal Revenue Service (IRS) reminds taxpayers that they must answer a digital asset question on their tax returns and report all related income. This includes cryptocurrency, non-fungible tokens (NFTs), and other digital assets that have a value.

What is a Digital Asset?

A digital asset is a digital representation of value that is recorded on a cryptographically secured distributed ledger or any similar technology. This includes cryptocurrency, NFTs, and other digital assets that are stored on a blockchain.

Taxation of Digital Assets

Income from digital assets is taxable. This includes gains from the sale or exchange of digital assets, as well as income earned from mining or staking digital assets. The tax rate for capital gains from digital assets depends on how long the asset was held before it was sold. If the asset was held for more than one year, it is taxed at the long-term capital gains rate. The long-term capital gains rates for the 2023 tax year are 0%, 15%, and 20%. If the asset was held for one year or less, it is taxed at the short-term capital gains rate. The short-term capital gains rate is the same as your ordinary income tax rate.

Reporting Digital Assets on Your Tax Return

Taxpayers must answer a digital asset question on their tax returns. The question asks if the taxpayer has received, sold, sent, exchanged, or otherwise acquired any digital assets. If the taxpayer answers "yes" to the question, they must report all digital asset related income on their tax return. This includes gains from the sale or exchange of digital assets, as well as income earned from mining or staking digital assets.

Penalties for Failing to Report Digital Assets

Taxpayers who fail to report digital asset related income may be subject to penalties. The penalties can be as high as 75% of the unreported income.

Conclusion

Digital assets are a new and evolving asset class. It is important to understand the tax implications of digital assets before you invest in them. If you have any questions about the taxation of digital assets, please consult with a tax professional.