While cryptocurrency is the most commonly discussed digital asset, many others are increasingly being adopted and traded. The IRS has broadened its focus to include all digital asset transactions—not just crypto.
This guide covers:
- Basic Definitions
- Types of Digital Assets
- Taxation of Digital Assets
- Digital Assets – Ordinary vs. Capital Transactions
- Charitable Contributions Using Digital Assets
- Other Definitions Related to Digital Assets
Basic Definitions
What Are Digital Assets?
A digital asset is anything created and stored digitally that holds value, has ownership, and is discoverable. Examples include:
- Photographs, videos, manuscripts, documents, audio files
- Cryptocurrency
- NFTs
- Asset-backed tokens
- Tokenized real estate
- Central bank digital currencies (CBDCs)
- Security tokens
These assets often utilize blockchain technology for ownership and transfer.
What Is a Blockchain?
A blockchain is a decentralized, digital ledger shared across a network. It:
- Stores information in blocks that are cryptographically linked
- Enables secure, immutable recording of transactions
- Powers the trading and ownership of digital assets
Types of Digital Assets
Cryptocurrencies (Virtual Currencies)
- Digital currency secured by cryptography and powered by blockchain
- Functions as a medium of exchange
- Not issued by governments or banks
Non-Fungible Tokens (NFTs)
Unique digital assets stored on the blockchain that can represent:
- Art, music, photos, videos
- Real estate, documents, event tickets, domain names
- Digital collectibles and avatars
Asset-Backed Tokens
Digital tokens representing ownership of a real-world asset (e.g., gold, oil, real estate).
Tokenized Commercial Real Estate
A form of asset-backed token where real estate value is divided into smaller shares (tokens), giving partial ownership via blockchain.
Stablecoins
Cryptocurrencies pegged to another currency, commodity, or financial instrument to reduce volatility.
Central Bank Digital Currencies (CBDCs)
Digital legal tender issued by a country’s central bank. Not considered cryptocurrency.
Over 105 countries are exploring CBDCs; 10 countries have launched one.
Taxation of Digital Assets
Currently, the IRS has provided only limited guidance on the tax treatment of virtual currency (cryptocurrency). For other digital assets—such as non-fungible tokens (NFTs), tokenized commercial real estate, asset-backed tokens, and similar types—their taxation generally follows the rules applied to capital assets like stocks, bonds, and real property. However, in certain cases, a digital asset may be treated as an ordinary asset if it is sold to customers in the ordinary course of the individual’s trade or business.
Virtual Currency
- Treated as property, not currency (IRS Notice 2014-21).
- Using crypto to purchase goods/services or converting it to cash triggers a capital transaction.
- Report on Form 8949, flowing to Schedule D.
Non-Fungible Tokens (NFTs)
- Lacking clear IRS guidance, most NFTs are taxed as capital assets unless created or sold in a trade/business.
- Creators recognize ordinary income on sale (report on Schedule C).
- Investors report capital gains/losses on Form 8949 → Schedule D.
- If the NFT is a collectible, the gain may be taxed at a maximum rate of 28%.
- Using crypto to buy an NFT triggers a capital gain/loss event.
Other Digital Assets
- Generally treated like capital assets (stocks, bonds, real estate).
- Sale triggers capital gain/loss, reported on Form 8949 → Schedule D.
- Ordinary treatment applies if the asset is sold as part of a trade or business.
Other Taxable Digital Asset Activities
- Staking Crypto – Value of rewards is ordinary income when received.
- Mining Crypto – Coins received are ordinary income at the time received.
- Hard Forks & Airdrops –
- Hard forks → generally not taxable unless new coins are received.
- Airdrops → taxable as ordinary income.
- Exchanging one digital asset for another → triggers a capital gain or loss.
Ordinary vs. Capital Transactions
Ordinary Income
Digital assets are taxed as ordinary income when:
- Received as payment for services (W-2 income).
- Received as payment for goods/services in a business (reported on Schedule C).
Capital Transactions
Occurs when:
- Digital assets are sold or converted into cash
- Used to purchase goods/services
Each transaction must be reported on Form 8949 → Schedule D, and results in:
- Short-term gain/loss (held 1 year or less)
- Long-term gain/loss (held more than 1 year)
Basis = Fair market value when received
Sales price = Value of goods/services or cash received
Business Expenses Using Digital Assets
When a business uses crypto for purchases:
- The purchase is recorded as a business expense.
- The crypto usage is recorded as a capital transaction.
Charitable Contributions Using Digital Assets
Digital asset donations to qualified charities are not taxable to the donor.
Deduction Amount Depends on Holding Period:
- Held more than 1 year: Deduct fair market value
- Held 1 year or less: Deduct lesser of basis or FMV
Other Key Definitions
- Wallet: A software or hardware tool used to store and access digital assets. Includes public & private keys.
- Cold Wallet: Offline storage of crypto (e.g., USB devices) to prevent hacking.
- Hard Fork: Blockchain split that may result in new coins (not taxable unless received).
- Airdrop: Free distribution of tokens to promote new digital assets (taxable as ordinary income).
- Mining: Earning crypto by validating blockchain transactions (taxable as income).
- Staking: Locking up crypto to earn more coins (taxable income upon receipt).
- Token: A digital unit of value on a blockchain.
- Utility Tokens: Provide access to a product/service; not regulated.
- Security Tokens: Represent ownership rights or asset value; SEC-regulated.
- Smart Contract: Self-executing program on a blockchain based on preset conditions.
- Web3: Decentralized internet architecture that allows user ownership of data and digital assets.
- DeFi (Decentralized Finance): Financial activities conducted without traditional institutions.
- ICO (Initial Coin Offering): Fundraising mechanism for new crypto projects.
For more detailed IRS guidance:
