How Are Digital Assets Taxed?

In recent tax years the IRS has become increasingly invested in ensuring that taxpayer are paying the appropriate taxes on their digital assets.

The official IRS definition of digital asset includes:

• Virtual currency (Bitcoin, Ethereum, etc)
• Nonfungible tokens (NFTs)
• Tokenized assets
• Stable coins
• Security tokens
• Any other assets that are digital and have value, established ownership, and are discoverable

On every tax return filed in tax year 2022 the taxpayer must answer the following question yes or no.

If the taxpayer answers the question yes, then the transactions need to reported regardless of whether the taxpayer has a gain or a loss. For federal tax purposes digital assets are treated as property. The rate at which digital assets are taxed depends on whether are short or long term assets and the taxpayers tax  rate.

Short Term Transactions

Short term capital gains (assets held less then one year) are taxed up to 37% as ordinary income.

Long Term Transactions

Long term gains (assets held greater than one year) are taxed at a lower rate of either 0-20%.