By Martin Wongkoltoot, Tax Supervisor
Digital assets, such as cryptocurrencies, NFTs (non-fungible tokens), and other blockchain-based tokens, have moved firmly into the financial mainstream. With that growth has come heightened scrutiny from the U.S. Internal Revenue Service. Whether you’re actively trading, long-term investing, or simply holding digital assets, understanding how they’re taxed is essential.
In this overview, H&S Tax Supervisor Martin Wongkoltoot breaks down what counts as a digital asset, when taxes are triggered, and what you can do now to stay compliant as regulations continue to evolve.
What Are Digital Assets?
The IRS defines digital assets as any digital representation of value recorded on a cryptographically secured distributed ledger (commonly known as a blockchain). This includes:
- Cryptocurrencies such as Bitcoin, Ethereum, and Solana.
- Stablecoins, which are pegged to a fiat currency like the U.S. dollar (e.g., USDC, USDT).
- Non-Fungible Tokens (NFTs) that represent ownership of unique digital or physical items.
- Other blockchain-based tokens.
Are Digital Assets Taxable?
In short, yes. For federal tax purposes, digital assets are treated as property. As a result, transactions involving digital assets may generate capital gains, capital losses, or ordinary income depending on how the asset is used.
Common Taxable Events
You may trigger a taxable event if you:
- Sell a digital asset for fiat currency (such as U.S. dollars).
- Trade one digital asset for another (for example, Bitcoin to Ethereum).
- Use cryptocurrency to purchase goods or services.
- Receive digital assets through mining, staking, airdrops, or as compensation.
Each of these activities must be reported on your tax return and can result in either capital gain/loss treatment or ordinary income.
How H&S Reports Digital Assets on Your Tax Return
When we prepare your tax return, digital asset activity is reported as follows:
- Capital gains and losses are reported on Form 8949 and Schedule D
- Income from mining, staking, or crypto payments is reported as ordinary income on Form 1040 and may be subject to self-employment tax
- The digital asset question on Page 1 of Form 1040 must be answered
We will check “yes” if, during the year, you:
- Received digital assets as compensation, rewards, or awards.
- Acquired digital assets through mining, staking, or a blockchain fork.
- Sold or exchanged digital assets for other assets, property, or services.
- Disposed of digital assets in any manner, including converting them to U.S. dollars.
Recordkeeping Is Key
Accurate records are essential. Be sure to retain documentation of:
- Dates of acquisition and sale.
- Fair market value (FMV) at the time of each transaction.
- Transaction fees.
- Wallet addresses and exchange information.
Strong documentation can help avoid errors, penalties, and unnecessary IRS inquiries.
IRS Enforcement and Penalties
The IRS is increasing enforcement efforts through:
- Expanded information reporting from exchanges, including Form 1099-DA beginning in Tax Year 2025.
- IRS compliance letters sent to taxpayers suspected of underreporting.
- Civil penalties, and, in extreme cases, criminal prosecution.
Being proactive and accurate with digital asset reporting has never been more important.
Important Changes Coming in 2025
Several significant developments are reshaping crypto taxation:
- U.S. crypto exchanges will report transactions on Form 1099-DA, increasing transparency.
- Investors must move from universal accounting to wallet-by-wallet accounting when determining cost basis.
- Until exchanges coordinate cost-basis tracking similar to stock brokers, investors must personally track transfers between wallets.
- Taxpayers are strongly encouraged to address prior-year crypto filings to reduce compliance risk.
- Regulations are expected to continue evolving; professional guidance and, if needed, filing extensions can help manage uncertainty.
- President Trump recently signed the GENIUS Act, establishing a regulatory framework for dollar-backed stablecoins.
Key Policy Proposals Under Consideration
Looking ahead, lawmakers are considering several other impactful changes:
- Formal classification of digital assets as a separate asset class for income tax purposes.
- Extension of wash-sale rules to crypto, potentially eliminating a popular loss-harvesting strategy.
- New reporting requirements for foreign-held digital asset accounts, similar to FBAR and FATCA rules.
What You Can Do Now
To stay ahead:
- Review your 2025 digital asset transactions.
- Consult your H&S team if you received crypto through staking, airdrops, or compensation.
- Ask us for help reconciling exchange and wallet reports.
- Schedule a consultation with us to ensure your tax strategy is on track.
Digital asset taxation is complex and changing quickly. If you’re unsure how to report your activity or want to be proactive about planning, our tax advisors are here to help you stay compliant and minimize your tax exposure. Reach out to your H&S team for guidance.
