What Are the Tax Rules for Digital Assets?

The Internal Revenue Service (IRS) defines digital assets as property for federal income tax purposes. This classification means that general tax principles applying to property transactions also apply to digital assets like cryptocurrencies, stablecoins, or non-fungible tokens (NFTs). Consequently, many actions involving these assets can result in taxable income.

This framework requires taxpayers to track the value of their digital assets from acquisition to disposal. The difference in value at these two points often determines whether a tax liability exists, which requires identifying taxable activities, calculating the resulting gains or losses, and reporting them accurately to the IRS.

Identifying Taxable Digital Asset Events

The IRS broadly defines a digital asset as any digital representation of value recorded on a cryptographically secured distributed ledger, which includes cryptocurrencies, stablecoins, and NFTs. Understanding which interactions with these assets trigger a tax obligation is the first step in compliance. A taxable event occurs when you dispose of a digital asset.

Selling a digital asset for fiat currency, like U.S. dollars, is a taxable event. Exchanging one digital asset for another is also a disposition that triggers tax consequences; for example, trading Bitcoin for Ethereum is treated as a sale of Bitcoin. Using digital assets to pay for goods or services also constitutes a taxable transaction.

Conversely, not every action is a taxable event. The tax is incurred only upon its sale or disposition, so simply buying and holding a digital asset does not create a tax liability. Other non-taxable activities include:

• Transferring digital assets between wallets or accounts that you own.
• Donating digital assets to a qualified charity.
• Gifting a digital asset, provided its value is below the annual gift tax exclusion amount.
• Receiving a digital asset as a gift.

These non-taxable activities do not require the calculation of gains or losses.

Calculating Gains and Losses

Once a taxable event has been identified, the next step is to calculate the resulting capital gain or loss. This calculation hinges on the asset’s cost basis, its fair market value (FMV) at the time of the transaction, and the holding period. The formula is the fair market value minus the cost basis, which equals your capital gain or loss.

The cost basis is the original value of the asset when you acquired it, including any associated fees. For example, if you purchased one unit of a cryptocurrency for $1,000 and paid a $20 transaction fee, your cost basis for that unit is $1,020. Fair market value is the price of the digital asset in U.S. dollars at the date and time of the sale or exchange. The FMV can be determined by data from the exchange where the transaction occurred or by using a value from a blockchain explorer.

The holding period determines the character of the gain or loss and the corresponding tax rate. A short-term gain or loss results from selling an asset held for one year or less and is taxed at ordinary income tax rates, which range from 10% to 37%. A long-term gain or loss applies to assets held for more than one year and is taxed at preferential rates of 0%, 15%, or 20%, depending on your total taxable income.

Taxation of Specific Digital Asset Transactions

Digital assets can be acquired through methods other than direct purchase, and these scenarios have distinct tax treatments. When you receive an asset as income, its fair market value at the time of receipt is taxed as ordinary income, and that value becomes your cost basis for the asset.

Payments, Mining, and Staking

When you receive digital assets as payment for goods or services, the asset’s FMV on the date of receipt is considered ordinary income. For both mining and staking rewards, the FMV of the coins at the time you gain control over them is taxed as ordinary income. An individual has control when they have the ability to sell, exchange, or otherwise transfer the asset. If you engage in these activities as a business, this income is reported on Schedule C and is subject to self-employment tax.

Airdrops and Hard Forks

If a hard fork occurs but you do not receive any new cryptocurrency, you do not have any taxable income. However, if you receive new cryptocurrency from an airdrop following a hard fork, you must recognize ordinary income equal to the FMV of the new coins at the time you gain control over them. This value also establishes the cost basis for the newly acquired assets.

Gifts and Inheritances

When you receive a digital asset as a gift, you take on the donor’s original cost basis and holding period. For inherited digital assets, the cost basis is “stepped-up” to the fair market value of the asset on the date of the original owner’s death. This can substantially reduce the capital gains tax owed by the heir upon a subsequent sale.

Reporting Digital Assets on Your Tax Return

Reporting digital asset transactions begins with a question near the top of Form 1040, which requires a “Yes” or “No” answer to whether you engaged in certain digital asset transactions during the tax year. For taxpayers who have disposed of digital assets held as capital assets, Form 8949 is required. This form is used to detail each individual transaction, including a description of the asset, the dates it was acquired and sold, the sale proceeds (the FMV), the cost basis, and the resulting gain or loss.

The totals from Form 8949 are then transferred to Schedule D, Capital Gains and Losses. Schedule D consolidates all capital gains and losses from your investments to arrive at a net capital gain or loss, which is then entered on your main Form 1040. If you received digital assets as income from activities like staking or mining outside of a formal business, this income is reported on Schedule 1 of Form 1040.

Beginning with tax year 2025, centralized crypto exchanges will be required to issue a new Form 1099-DA to report digital asset proceeds to both taxpayers and the IRS. These forms, which you will receive in early 2026, are intended to simplify the reporting process, but the requirement was repealed for decentralized finance (DeFi) platforms that do not custody assets.

Special Considerations and Rules

Several specific rules and considerations apply to digital assets. One such rule is the wash sale rule, which prevents securities investors from claiming a loss on a sale if they repurchase a substantially identical security within 30 days. Currently, the IRS treats digital assets as property, not securities, so the wash sale rule does not apply to them. This means a taxpayer could sell a cryptocurrency at a loss and immediately buy it back while still claiming the loss.

Donating digital assets held for more than one year to a qualified charity can offer a tax advantage. The donor can take an itemized deduction for the full fair market value of the asset at the time of the donation. This allows the donor to avoid paying capital gains tax on the appreciation. For donations valued over $5,000, a qualified appraisal is required.

If a digital asset becomes completely worthless, such as from a failed project, you may be able to claim a capital loss. To do so, you must be able to prove the asset is entirely without value and that there is no hope of recovery. This is claimed in the year the asset becomes worthless and is reported as a sale with zero proceeds on Form 8949.

The tax treatment of Non-Fungible Tokens (NFTs) can be more complex. The IRS has indicated it may classify certain NFTs as “collectibles.” If an NFT is deemed a collectible, any long-term capital gains from its sale are taxed at a maximum rate of 28%, which is higher than the top 20% rate for most other capital assets.