Navigating the Taxation of Digital Assets
Authored by: Nathan Cacka, CPA, Financial Advisor & Manager
With Tax Day 2024 quickly approaching in a few weeks, you may have to report transactions with digital assets such as cryptocurrency and non-fungible tokens (NFTs) on your tax return. In this article, we will delve into the tax landscape surrounding digital assets, with a specific focus on nonfungible tokens (NFTs), cryptocurrency, and digital currency.
Defining Digital Assets
The Internal Revenue Service (IRS) defines digital assets as digital representations of value recorded on a cryptographically secured distributed ledger. These assets hold an equivalent value in real currency and can be utilized for transactions, digital trading, or exchanged for other assets. As the digital landscape evolves, it is crucial to acknowledge the IRS’s increasing interest in regulating and taxing these assets.
Tax Implications of Digital Assets
For federal tax purposes, digital assets are treated as property. The basis of property is generally what was paid for it. In the case of digital assets, the basis can be determined by either the amount paid for the asset or its fair market value at the time of receipt, whether through payment for goods or services or via mining.
Recording Digital Asset Transactions
To comply with IRS regulations, it is important to maintain detailed records of digital asset transactions. This includes information such as the type of digital asset, date and time of the transaction, number of units, and the fair market value in USD. Accurate record-keeping ensures transparency and aids in determining the basis for taxation.
Tax Forms for Reporting Digital Asset Transactions
Reporting digital asset transactions on the correct tax form is essential for meeting IRS requirements. Here’s a brief guide on which forms to use based on the nature of the transaction:
- Form 1040 Schedule D: Capital Asset Transactions
- Use this form if you held the digital asset as a capital asset.
- Report sales or exchanges for USD or other digital assets.
- Form 1040: Ordinary Income Reporting
- Report ordinary income from receiving digital assets through forks, staking, mining, or as an employee.
- Differentiate between capital assets and ordinary income for accurate reporting.
- Form 1040 Schedule C or Business Tax Return: Business Transactions
- If involved in business-related digital asset transactions, report them as ordinary income.
- Specify the nature of the transaction and the applicable business tax return.
With a growing emphasis on transparency, accurate record-keeping, and proper reporting is paramount. By understanding the tax implications of digital assets, you can ensure compliance with the ever-evolving tax landscape. For more detailed information, individuals are encouraged to visit the IRS website or reach out to your local accountant.
For more information, visit our website at cnccpa.com or give us a call at (509) 663-1661, and we’ll begin helping you, your family or your business today.
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Source: IRS.gov
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