In the era of technology and innovation driving a digital assets transformation, how the IRS views traditional investments is changing. In particular, the popularity of cryptocurrency like Bitcoin and non-fungible tokens (NFTs) has introduced new approaches to taxes and financial regulation for digital assets.
We will look at how the IRS views digital assets, when you must report them on taxes, and how much tax you will pay.
What are Digital Assets?
Digital assets are created and stored as digital tokens using cryptography. Like stocks or real estate, the value of digital assets depends on how much people are willing to pay for them. Scarcity and uniqueness add value too.
Popular examples of digital assets owned and transferred using blockchain technology include:
- Cryptocurrencies and convertible virtual currencies
- Digital collectibles
- Digital tokens
- NFTs
- Smart contracts
- Stablecoins
When Do You Report Digital Assets to the IRS?
For tax purposes, the IRS classifies digital assets as property. This means digital assets will have capital gains or losses like buying and selling real estate and stocks.
So, the IRS requires individuals and businesses to report all transactions involving digital assets on tax returns, whether buying or selling digital assets or receiving payments related to digital assets.
Specific examples of when to report digital assets on your tax return include:
- You sold digital assets
- Your traded your digital assets for other digital assets
- You disposed of your financial interest in your digital assets
- You received or exchanged digital assets for services rendered or as a payment for property
- You received new digital assets through mining or staking activities
- You were gifted digital assets
How Do You Report Taxable Income from Digital Assets on Your 1040?
If you make any transactions for digital assets, you will first check the “Yes” box on your Form 1040 digital assets question. Then, you will calculate your gains and losses using Form 8949, report the total amount on Schedule D, and enter it on 1040 line 7.
Some tax documents you may receive to help you report digital assets include a 1099-B if you use a platform to do digital assets transactions and a 1099-MISC or 1099-NEC if you mine digital assets or receive digital assets as gifts or awards.
Do Employees Paid With Digital Assets Count the Amount as Wages?
If you are an employee paid with digital assets, the IRS counts the amount paid as wages. This means you must report the value of the digital assets received as wages when filing a tax return.
Keep in mind that since the value of digital assets at time of payment is subject to income tax, employers might be required to withhold taxes from such payments.
If you are self-employed or a freelancer and you receive payments as digital assets, then you will report them on Schedule C.
How Much are Taxes on Digital Assets?
As mentioned above, cryptocurrency and other digital assets are subject to capital gains taxes. The tax deadline for reporting and paying taxes on digital assets is the same as for traditional assets. Here are the capital gains taxes you will pay:
Short-term Digital Assets Gains
Capital gains for digital assets held for less than one year, known as short-term capital gains, are subject to a taxpayer’s regular income tax rate of 10% to 37% depending on income.
Long-term Digital Assets Gains
Capital gains for digital assets held for more than one year, known as long-term capital gains, are subject to a lower tax rate of 0% to 20% depending on income.
When Do You Not Have to Include Digital Assets on Taxes?
The IRS says taxpayers who simply owned digital assets do not have to include them on Form 1040. Examples for when you do not report digital assets include:
- You held your digital assets in a wallet or account
- You transferred your digital assets from a wallet or account you own to another account you also own
- You purchased your digital assets using US currency or other real currency
As ownership of digital assets becomes even more popular, it is critical to know when you must pay the IRS taxes for buying, selling, receiving, or trading them.
The IRS has clear guidance on reporting digital asset transactions on your tax return, and not reporting or underreporting digital assets can result in expensive tax penalties.
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