What Are Digital Assets? Understanding the Basics and Tax Reporting
In today’s rapidly changing financial landscape, the term “digital assets” has emerged as a key concept for businesses, investors, and even casual market participants. Whether you are a Web3 entrepreneur, an NFT collector, or simply an individual who holds cryptocurrency, it is important to understand exactly what digital assets are, how they differ from other types of property, and what is required when reporting earnings to the Internal Revenue Service (IRS). In this guide, we’ll break down the fundamentals of digital assets, explore the nuances of reporting earnings from them, and highlight how professional solutions like Integral can help streamline your accounting processes.
Defining Digital Assets
A “digital asset” generally refers to any electronic file or online property that holds real-world value. This might encompass everything from downloadable e-books and logos to cryptocurrency tokens and non-fungible tokens (NFTs). However, for U.S. tax purposes, the IRS definition is more specific:
A digital asset is any digital representation of value recorded on a cryptographically secured, distributed ledger (like a blockchain) or similar technology.
That includes:
Cryptocurrency (e.g., Bitcoin, Ethereum)
Stablecoins (e.g., USDC, USDT)
Non-fungible tokens (NFTs)
Virtual Currency vs. Digital Assets
Within this broader category, the IRS still uses the phrase “virtual currency” to describe certain cryptocurrencies that are primarily used as a medium of exchange (e.g., Bitcoin). NFTs, meanwhile, can be considered digital assets but are typically not used for everyday purchases. Hence, while all virtual currency is treated as a digital asset for tax purposes, not every digital asset is virtual currency.
Digital Assets and Taxation: Key Considerations
Digital Assets Are Treated as Property
For U.S. federal tax purposes, digital assets are treated as property. This means the IRS generally applies the same tax principles it uses for stocks, bonds, or real estate to cryptocurrency and other blockchain-based assets.
Capital gains and losses apply when you sell, exchange, or dispose of these assets.
Ordinary income rules apply if you receive digital assets as payment for goods or services, whether you’re an employee or an independent contractor.
Note on NFTs: Some NFTs may qualify as “collectibles” under the Internal Revenue Code (e.g., digital art). If so, they can be subject to a higher 28% capital gains rate for long-term gains, rather than the standard capital gains rates. Determining whether an NFT meets the definition of a collectible requires careful consideration under IRC § 408(m).
Reporting Requirements (Form 1040 Question)
If you file Forms 1040, 1040-SR, or 1040-NR, you’ll find a question asking whether you have received, sold, exchanged, or otherwise disposed of any digital assets during the year. The IRS uses this question to track and tax crypto-related transactions.
When to mark “Yes”: You should indicate “Yes” if you received digital assets as compensation, sold or traded them for other tokens or fiat, mined crypto, or participated in staking, or participated in activities where you ended up with a new coin (like a hard fork).
However, do note that while mining income is clearly taxable at the time of receipt, the IRS has offered limited guidance on staking rewards. Many filers take a conservative approach by recognizing staking income as ordinary income upon receipt, but future regulations or court rulings may clarify or change this treatment.
When to mark “No”: If you merely held your digital assets all year, transferred them between your own wallets, or purchased them with U.S. dollars (without selling or exchanging), you can safely mark “No.”
Income Types for Digital Assets
Digital assets held as capital assets:
Gains or losses come into play when you sell or exchange them.
Detailed recordkeeping (purchase price, sale price, dates of acquisition, etc.) is crucial for calculating gains or losses accurately.
Digital assets received as compensation:
If you receive tokens, coins, or NFTs in exchange for goods or services, you generally recognize ordinary income at the time of receipt.
Employees find this income on their W-2 forms, while independent contractors typically report it on a 1099-NEC or through their Schedule C (for sole proprietors).
Keeping Accurate Records
Your tax liability hinges on having a clear record of each transaction, including:
Dates of acquisition and sale
Fair market value (FMV) in U.S. dollars at both purchase and sale
Cost basis and any related transaction fees
How to Report Earnings from Digital Assets
Step 1: Determine Your Gains or Losses
For capital assets, subtract your cost basis (the price you originally paid, plus any fees) from the proceeds (the amount you received at sale).
A gain occurs if the proceeds exceed your cost basis.
A loss occurs if the proceeds are lower than your cost basis.
Step 2: Identify Short-Term vs. Long-Term
Short-term capital gains apply if you held the digital asset for one year or less.
Long-term capital gains apply if you held it for more than one year (noting that certain NFTs possibly classified as “collectibles” may face a higher 28% long-term rate).
Step 3: Choose the Right Tax Form
Form 8949 and Schedule D: Report sales or exchanges of digital assets held as capital assets.
Schedule C (Form 1040): If you receive digital assets as part of a business operation (e.g., a freelance gig, or if you actively trade them like a business), you may need to report it as business income.
Form 709: Required if you gifted digital assets above annual gift tax exemption thresholds.
RELATED STORIES
Integral: Streamlining Your Digital Asset Accounting
Whether you’re a small Web3 startup, a large NFT collection, or an investment fund, tracking your transaction history, fair market value, and cost basis can be challenging—especially when juggling multiple wallets, blockchains, and exchanges. Integral is here to help.
Automated Bookkeeping
Our system automatically classifies over 90% of transactions, handles multi-wallet and multi-exchange activities, and significantly reduces time spent on mundane data entry tasks. Rather than manually sorting through blockchain explorers and spreadsheets, you can rely on Integral’s powerful automated workflows to keep your books clean and current.
Legible Data & Real-Time Treasury Visibility
Web3 transactions can be inherently confusing: from spam NFT airdrops to complex on-chain swaps. Integral’s platform includes spam filtering, a unified ledger, and a visually intuitive user interface, making it easier than ever to see a real-time snapshot of your treasury across exchanges, wallets, safes, and custodians.
Flexible Policies and Streamlined Tax Calculations
Tax regulations for digital assets evolve rapidly. With Integral, you can customize accounting policies according to your specific business model—ensuring that your cost basis, gain/loss calculations, and holding-period tracking meet your organization’s standards (and those of the IRS).
Auditable Records & Reports
Why Correct Reporting Matters
Falling behind on digital asset tax compliance can lead to unnecessary headaches—penalties, interest charges, or even under-reporting issues. As the IRS steps up enforcement in this space, it’s critical for both individuals and businesses to accurately capture and report their crypto, NFT, and stablecoin transactions.
Having an integrated, crypto-focused accounting system can be the difference between frictionless compliance and a prolonged hunt for missing transaction data.
