Background on Taxation of Digital Assets

Background on Taxation of Digital Assets

Background on Taxation of Digital Assets

Little guidance addresses the taxation of digital assets. The U.S. Internal Revenue Code has generally been written to apply to transactions involving physical assets and more traditional IP (e.g., patents), and the IRS has struggled to issue timely guidance clarifying how the tax law applies to rapidly evolving technologies. For example, taxpayers are still awaiting final regulations addressing the taxation of cloud-based transactions.

The IRS has advised taxpayers that virtual currency (e.g., bitcoin, Ether or other cryptocurrency) “is treated as property” for U.S. income tax purposes,¹ but has yet to issue guidance specifically addressing other digital assets that leverage blockchain technology, such as NFTs. However, the

¹ Notice 2014-21, 2014-16 I.R.B. 938.

IRS virtual currency guidance is clearly relevant to many NFT transactions because NFTs are generally acquired in exchange for virtual currency. For example, taxpayers acquiring NFTs with virtual currency should be aware that such acquisition results in the recognition of gain or loss on the taxpayer’s virtual currency.²

Therefore, unless and until guidance directly addressing NFTs is issued, taxpayers will have to analyze NFT transactions by applying general tax law principles, possibly through the prism of the existing (if sparse) IRS guidance on virtual currency.

Background on Taxation of Digital Assets

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