What is a digital asset for tax purposes?

In this guide, we’ll break down everything you need to know about how digital assets are defined for tax purposes. We’ll share a few examples of digital assets and help you understand how to report them on your tax return. 

What is a digital asset for tax purposes?

According to the IRS, a digital asset refers to “any digital representation of value that is recorded on a cryptographically secured distributed ledger or similar technology”. 

The IRS’s definition of digital assets covers crypto-based assets — including cryptocurrencies, stablecoins, and NFTs. 

US dollars held on digital bank accounts and platforms like Venmo are not considered digital assets. The IRS’s definition refers to crypto-assets, not fiat currencies like the US dollar. 

What is an example of a digital asset?

Here are a few examples of digital assets, as defined by the IRS. 

• Cryptocurrencies like BTC and ETH 
• Stablecoins like USDC and USDT 
• NFTs like Bored Ape Yacht Club 

How do I answer the digital asset question on Form 1040?

The IRS asks the following question about digital assets on Form 1040: 

At any time during 2023, did you: (a) receive (as a reward, award or payment for property or services); or (b) sell, exchange, or otherwise dispose of a digital asset (or a financial interest in a digital asset)?

If you sold, disposed of, or received a gift in cryptocurrency assets, you should answer ‘Yes’ to this question. If you did not do any of the actions listed, you can answer ‘No’. 

It’s important to answer this question truthfully. Lying on this question is considered tax fraud — a serious crime with serious consequences. 

Do I have to report digital assets on my tax return?

If you sold, disposed of, or earned cryptocurrency during the year, you’ll have to report your income and capital gains from cryptocurrency on your tax return. 

When you dispose of a digital asset — such as selling your cryptocurrency or trading it away — you’ll incur a capital gain or loss depending on how its price changed since you originally received it. 

Meanwhile, when you earn a digital asset — such as receiving crypto in an airdrop or through staking rewards — you’ll recognize income based on its fair market value at the time of receipt.