What Is a Digital Asset for Tax Purposes?

Digital assets create a major tax compliance challenge. Federal tax revenue loses at least $50 billion due to unreported digital asset transactions. The IRS defines digital assets as any digital representation of value that exists on a cryptographically secured distributed ledger. These include cryptocurrency tokens, stablecoins, and NFTs. Understanding what is a digital asset for tax purposes is crucial, as it determines how these assets are reported and taxed under evolving regulations.

The IRS treats digital assets as property for tax purposes, and the tax rules keep changing. The agency now requires taxpayers to report all digital assets on Form 1040, not just virtual currency. A big change comes in 2025 when brokers must file Form 1099-DA. This will alter the map of digital asset management systems and compliance needs.

This guide helps taxpayers understand what digital assets mean for taxes. It aims to help them meet their obligations and avoid getting pricey compliance mistakes in their 2025 returns.

What Is a Digital Assets for Tax Purposes in 2025

The IRS has changed its terminology from “virtual currency” to “digital assets” for cryptocurrencies including Bitcoin to cover the growing digital economy. Tax reporting and compliance now depend on a clear understanding of digital assets and their tax implications.

Definition under IRS guidelines

Section 6045(g)(3)(D) defines what is considered a digital asset for tax purposes as any digital value representation recorded on a cryptographically secured distributed ledger or similar technology. The IRS classifies these assets as property rather than currency. This classification means every transaction could affect your taxes.

Your digital asset management system should track elements that affect tax treatment. The IRS guidelines specify that digital assets received as payment should be valued at their fair market value in US dollars when you get them.

Types of taxable digital assets

Digital assets go way beyond cryptocurrencies. Current IRS guidelines categorize taxable digital assets into:

1. Convertible Virtual Currencies:
2. Bitcoin, Ethereum with smart contracts, and other cryptocurrencies
3. Stablecoins like USDC
4. Digital tokens used for payments or investments
5. Non-Fungible Tokens (NFTs):
6. Digital art and collectibles
7. Gaming assets
8. Tokenized real estate
9. Virtual world assets

The IRS has created specific guidelines for different digital assets. Stablecoins get the same tax treatment as other cryptocurrencies, even though their value links to traditional currencies. NFTs also count as digital assets and face both capital gains and income tax based on how you use them.

These transactions can trigger tax events:

• Trading or selling digital assets for regular currency
• Converting between different digital assets
• Buying goods or services with digital assets
• Getting mining or staking rewards
• Earning interest through lending protocols
• Getting airdrops or hard fork proceeds

Starting January 1, 2025, brokers will need to use Form 1099-DA to report digital asset transactions. This form will show sales proceeds, transaction dates, and market values to help improve tax compliance.

The IRS has made it clear that moving assets between your personal wallets isn’t taxable. Also, you should keep complete records of all digital asset transactions because tax implications vary based on how long you hold them and what you do with them.

Tax year 2025 brings new reporting rules for businesses too. Companies must report digital asset transactions on several forms including Schedule D, Form 8949, Schedule C, and Form 1120 for corporations.

Digital asset tax rules need careful attention as they keep evolving. The IRS continues to update its approach, especially regarding NFTs that might be called collectibles and could face different tax rates.

Key Changes in Digital Asset Tax Rules

Tax regulations for digital assets will see major changes in 2025. These changes will reshape how what is a digital asset for tax purposes gets reported and tracked. The new rules want to make tax compliance easier and boost transparency in digital asset transactions.

New reporting requirements

Brokers who handle digital assets must report gross proceeds from sales and exchanges through Form 1099-DA starting January 1, 2025. This rule applies to:

• Digital trading platforms
• Payment processors
• Hosted wallet providers
• Real estate entities accepting digital assets

The Department of Treasury has made it clear that what is considered a digital asset for tax purposes now has cryptocurrencies, NFTs, and tokenized real estate. Brokers will get penalty relief as they adapt their systems during this transition.

Updated tax forms

The IRS created Form 1099-DA to report digital asset transactions. The form will capture these details when it launches in 2025:

• Gross proceeds from sales and exchanges
• Transaction dates
• Fair market value information

The reporting requirements will grow to include cost basis information in 2026. This step-by-step approach gives taxpayers and brokers time to adjust their record-keeping.

Digital asset management system updates

What is a digital asset management system becomes vital as the IRS moves from universal accounting to wallet-by-wallet tracking. The new guidelines state that:

• Each wallet needs separate transaction records
• Cost basis calculations must be specific to wallets
• Transaction records need links to specific sources

Notice 2025-7 from the IRS offers temporary relief for identifying digital assets held by brokers during 2025. Taxpayers can keep their own identification records during this time by choosing between:

• Individual sale tracking throughout the year
• Standing instructions applied consistently to custodial accounts

Of course, what is a digital asset everfi goes beyond basic transactions. The updated rules don’t require immediate reporting for some transactions until further guidance comes out:

• Wrapping and unwrapping transactions
• Liquidity provider activities
• Staking operations
• Digital asset lending

These changes will affect millions of taxpayers according to IRS estimates. They will change how what is a digital asset gets reported and tracked. The modifications ended up boosting compliance while giving taxpayers clearer guidance for accurate reporting.

What Is a Digital Asset for Tax Purposes and How Digital Assets Are Taxed

Tax treatment of what is a digital asset for tax purposes has become significant as the IRS now applies different rules based on asset usage and ownership. And, your tax obligations can change substantially depending on how you classify these digital assets – either as capital assets or ordinary income.

Capital gains treatment

The IRS classifies what is considered a digital asset for tax purposes as property that falls under capital gains tax rules. Your tax rates will depend on how long you hold these assets:

• Short-term gains (assets held ≤ 1 year): Ordinary income rates between 10% and 37% apply
• Long-term gains (assets held > 1 year): Preferential rates of 0%, 15%, or 20% apply

Taxpayers should track their cost basis – the original purchase price in U.S. dollars. You need detailed records to determine what is a digital asset for capital gains. These records must include:

• Acquisition date and time
• Number of units acquired
• Fair market value at acquisition
• Disposal date and proceeds

Income tax implications

What is a digital asset management system helps track various income-generating activities. Regular income tax rates apply to:

• Mining rewards shown on Form 1099-NEC at fair market value
• Payments received for goods or services
• Staking rewards that work like interest income
• Airdrops and hard fork proceeds

Brokers will start issuing Form 1099-DA to report digital asset proceeds by 2025. You can only deduct the acquisition cost from digital asset sales. The IRS doesn’t allow deductions for transaction fees and related costs.

State tax considerations

What is a digital asset everfi means different things in different states. Most states haven’t provided clear guidance on digital asset taxation. All the same, some states have taken clear positions:

• California, New Jersey, and New York treat virtual currencies like cash equivalents
• Michigan exempts convertible virtual currency purchases from sales tax
• Minnesota and Missouri see digital assets as intangible property

What is a digital asset lines up with federal treatment for state tax purposes in many cases, though variations exist. States either follow the IRS property classification or create their own unique categories.

States keep reshaping the scene of digital asset taxation. Washington state offers a good example – cryptocurrency purchases remain tax-free, but transactions made with digital assets face taxation just like cash transactions.

Common Digital Asset Tax Events

The IRS has listed several transactions that create tax obligations for digital assets. You need to pay close attention to these common taxable events that shape reporting requirements to understand what is a digital asset for tax purposes.

Trading and selling

Let’s start by exploring what is considered a digital asset for tax purposes through various trading scenarios that create tax obligations. Every crypto-to-crypto transaction counts as a taxable event. This means when you sell or trade digital assets:

• Converting one cryptocurrency to another triggers capital gains tax
• Using digital assets to buy goods or services creates taxable events
• Selling digital assets for regular currency requires tax reporting

The IRS wants you to report all buy, sell, swap, deposit, and transfer activities on tax returns. This is a big deal as it means that what is a digital asset management system must track these transactions carefully to ensure accurate reporting.

Mining and staking

Mining and staking come with their own tax implications. Here’s what you need to know about mining operations:

• The IRS taxes mining rewards as ordinary income based on fair market value at receipt
• Business miners can write off equipment costs through Section 179
• You can deduct electricity costs used just for mining as business expenses

Revenue Ruling 2023-14 makes it clear that staking rewards are taxable income. You must include the fair market value of validation rewards in your gross income during the tax year you gain control over them.

NFT transactions

The NFT space brings unique tax considerations to what is a digital asset. NFTs generate two types of taxable income:

• Capital gains when you:
• Sell NFTs for cryptocurrency
• Trade one NFT for another
• Use NFTs in DeFi transactions
• Ordinary income from:
• NFT creation and sales
• Royalty payments
• Airdrops

What is a digital asset everfi extends to specific NFT events. You don’t pay taxes when minting an NFT – taxes kick in when you sell, trade, or convert it. You can add gas fees from NFT transactions to your cost basis.

The IRS uses a ‘look-through’ approach to determine if an NFT qualifies as a collectible. The maximum tax rate hits 28% in these cases – higher than typical long-term capital gains rates. This makes understanding what is a digital asset for tax purposes crucial for NFT collectors and traders.

DeFi participants should know that swapping cryptocurrency for liquidity pool NFTs might trigger capital gains tax events. On top of that, if lenders seize your NFT collateral, the IRS calls it a taxable sale.

Digital Asset Tax Filing Steps

Filing accurate tax returns for digital assets needs proper record-keeping and documentation. Taxpayers must understand what is a digital asset for tax purposes to meet complex reporting requirements.

Required documentation

The Internal Revenue Code requires detailed records for what is considered a digital asset for tax purposes. Your essential records should include:

• Purchase and receipt documentation
• Sale or exchange records
• Fair market value in U.S. dollars at transaction time
• Transaction dates and times
• Number of units in each transaction

Brokers will issue Form 1099-DA from 2025 onward. This form helps you understand what is a digital asset by giving you structured documentation of your transactions.

Calculating gains and losses

You need to understand what is a digital asset management system to determine accurate profits and losses. Your calculations must track:

• Cost basis (original purchase price plus fees)
• Sale price (proceeds from the transaction)
• Holding period (duration between purchase and sale)
• Transaction fees

The IRS lets you use different accounting methods to calculate gains and losses. You must determine your basis through:

• First-In-First-Out (FIFO)
• Last-In-First-Out (LIFO)
• Highest-In-First-Out (HIFO)

Transaction fees affect your overall gains by increasing the asset’s cost basis. You need detailed records of all fees to calculate taxes right.

Using tax software

The complexity of digital asset taxation means understanding what is a digital asset everfi includes using the right tax software. The IRS now works with more tax preparation platforms.

Tax software will add new features in 2025:

• Automated Form 1099-DA integration
• Digital asset transaction tracking
• Cost basis calculations
• Gain/loss computations

Your chosen software should support:

• Multiple exchange imports
• Various accounting methods
• Basis tracking across wallets
• Transaction categorization

Brokers must set up new reporting systems by January 2025. These systems will track and report:

• Gross proceeds from sales
• Adjusted basis information
• Transaction dates
• Fair market value at time of sale

You must keep enough records to back up positions on federal income tax returns. The IRS wants documentation of fair market value for all digital assets you receive as income or payment.

The IRS wants you to keep records that verify:

• Identity of all parties involved
• Transaction amounts and dates
• Nature of transactions
• Business purpose (if applicable)

Brokers will start including tax basis information in their reports from 2026. You should keep your own records during this transition to ensure your filings stay accurate.

What Is a Digital Assets for Tax Purposes Frequently Asked Questions

What is a digital asset?

A digital asset is any form of content or value stored electronically, often using blockchain or other secure technologies. Examples include cryptocurrencies, NFTs, digital documents, videos, and even intellectual property stored in digital formats. As the digital economy grows, businesses and individuals are increasingly managing and securing their digital assets to ensure proper ownership and compliance.

What is considered a digital asset for tax purposes in 2025?

A digital asset is any digital representation of value recorded on a cryptographically secured distributed ledger or similar technology. This includes cryptocurrencies, stablecoins, NFTs, and other digital tokens used for payments or investments.

How will digital asset transactions be reported in 2025?

Starting January 1, 2025, brokers will be required to report gross proceeds from digital asset sales and exchanges on a new tax form called Form 1099-DA. This form will include details such as transaction dates and fair market value information.

What are the tax implications for trading or selling digital assets?

Trading or selling digital assets is subject to capital gains tax. Short-term gains (assets held for one year or less) are taxed at ordinary income rates, while long-term gains (assets held for more than a year) are taxed at preferential rates of 0%, 15%, or 20%.

How are mining and staking rewards taxed?

Mining and staking rewards are generally taxed as ordinary income based on their fair market value when received. Business miners may be able to deduct equipment costs and electricity expenses used exclusively for mining.

What documentation is required for digital asset tax reporting?

Taxpayers must maintain comprehensive records of all digital asset transactions, including purchase and sale documentation, fair market value in U.S. dollars at the time of transactions, transaction dates and times, and the number of units involved in each transaction.

What is considered a digital asset for tax purposes?

For taxation, digital assets include cryptocurrencies, stablecoins, and NFTs, as defined by the IRS. The tax treatment of these assets is evolving, with new reporting requirements such as Form 1099-DA coming into effect in 2025. Understanding what is a digital asset for tax purposes helps taxpayers comply with regulations and avoid penalties.

What is a digital asset management system?

A digital asset management system (DAMS) is a software platform used to organize, store, and retrieve digital assets efficiently. These systems help businesses manage large volumes of digital files such as images, videos, and documents while ensuring security and accessibility. Companies use DAMS to streamline workflows, enhance collaboration, and maintain compliance with industry standards.