Digital assets have been a red-hot topic in the news in 2024. What’s rarely talked about is the tax implications that go along with this asset class. Let’s take a look at the most up-to-date digital asset tax implications as we approach the end of the year.

What does the IRS Consider a “Digital Asset”?

For tax purposes in the United States, the IRS recognizes digital assets as property, not currency.

The tax definition of a digital asset is “any digital representation of value recorded on a cryptographically secured, distributed ledger (blockchain) or similar technology.” A digital asset must be stored electronically. It can be bought, sold, owned, transferred, or traded. Examples include:

• Convertible virtual currencies and cryptocurrencies (i.e. bitcoin, ethereum, solana, ripple, etc.)
• Stablecoins
• Non-fungible tokens (NFTs)

Digital Asset Tax Implications

Since the IRS classifies digital assets as property, individuals are required to pay taxes on transactions (as they are with transactions related to other property). Taxes are due when a sale, trade of one digital asset for another, or disposal in any way causes a gain to be recognized.

Selling a digital asset in exchange for a fiat currency or using a digital asset to purchase a good or service may create tax implications if the value of the digital asset has increased. Remember that fiat currency is a government-issued currency that is not backed by a physical commodity (i.e. gold or silver), but rather by the government that issued it. Most coin and paper currencies used throughout the world are fiat (including the U.S. Dollar, the Euro, the British Pound, and the Indian Rupee).

Buying a digital asset is not a taxable event. Neither is buying and holding a digital asset whose value increases. When filing taxes, the IRS requires individuals to answer a question on Form 1040 detailing if they had any transaction related to a digital asset during the previous year.

New 1099-K reporting requirements for 2024 require third-party payment platforms (like digital currency exchange) to share with the IRS if your transactions total $5,000 or more, regardless of the number of transactions made. This is a significant change from 2023, when reporting was only required if you made 200 third-party network transactions totaling at least $20,000 during the year.

If an individual fails to report a digital asset taxable event, interest, penalties, and in some cases criminal charges may materialize if the IRS performs an audit.

Taxable Income and Capital Gains

Digital asset tax rates depend on multiple factors including an individual’s income, tax filing status, and the length of time they owned the digital asset before a sale. When a gain is realized after selling or disposing of a digital asset, an individual must pay taxes on the amount of the gain.

If it was owned for 365 days or less, short-term gains tax would be paid (and these gains are taxed as ordinary income). If it was owned for longer than a year, long-term gains tax would be paid.

Each and every time an individual trades a digital asset, they need to keep track of how much was gained or lost in U.S. dollars. Digital asset gains and losses are reported on Form 8949. Digital assets are taxed like stocks, and the tax rates for digital asset gains are the same as capital gains taxes for stocks.

If an individual sells a digital asset for less than they paid for it, it can be claimed as a capital loss and used to offset other income taxes.

Long-Term Digital Asset Tax Rates for 2024

Short-Term Digital Asset Tax Rates for 2024

Digital Asset Income – Fair Market Value

There are certain scenarios where digital asset income may provide income without an individual actually selling a digital asset. The most common examples of this are:

• Receiving a digital asset as payment for providing a service
• Mining a digital asset and earning rewards
• Staking a digital asset and earning rewards
• Lending a digital asset and receiving interest payments

In these cases, digital asset income is taxed as ordinary income at its fair market value on the date that the individual receives it. Fair market value (FMV) is defined as an asset’s estimated value if it were sold today in the current market.

Have More Digital Asset Questions?

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Investment advisory services offered through Crossover Capital Brands, LLC (dba Crossover Capital), a Registered Investment Advisor with the U.S. Securities and Exchange Commission.

This material is intended for informational purposes only. It should not be construed as legal or tax advice, and is not intended to replace the advice of a qualified attorney or tax advisor. This information is not an offer or a solicitation to buy or sell securities. The information contained may have been compiled from third party sources, and is believed to be reliable.

Alternative investments – such as hedge funds and private equity/venture capital funds – are speculative and involve a high degree of risk. Likewise, the emergence of digital assets comes with its own speculative characteristics and involves a high degree of risk. Various digital assets have unique features, and the regulatory risk environment continues to change as governance requirements, rules, and lawsuits emerge. There may be material differences in the type of marketplaces available for digital assets, and there could be significant restrictions or limitations on withdrawing from or transferring these types of investments. Digital assets may incur higher fees when compared to traditional assets, and these expenses may offset returns.

Crossover Capital may not be able to independently verify digital asset valuations provided by institutions that hold or offer digital asset services. As a result, Crossover Capital will generally rely on information reported to it by third parties. As such, the information contained herein is for informational purposes. Clients should recognize that they may bear digital asset-based fees and expenses at the manager-level, as well as indirect fees, expenses, and performance-based compensation for digital assets. Spot bitcoin exchange-traded products were recently approved for listing and trading by the SEC. However, such approvals do not indicate SEC approval to use or invest in bitcoin. Clients should remain cautious and aware of the various risks associated with digital assets that have a value tied to bitcoin or other crypto related products.