Federal agencies and lawmakers continue to try to navigate the best way to handle digital assets. When it comes to taxes, the Internal Revenue Service (IRS) views digital assets as a type of property. The IRS defines digital assets as any digital representation of value recorded on a cryptographically secured ledger or similar technology. Examples of digital assets recognized by the IRS include cryptocurrency and non-fungible tokens (NFTs).
How does the IRS handle digital assets?
There are times the IRS expects taxpayers to report these assets. Taxable events can include a sale or exchange of a digital asset for goods, services, or another digital asset as well as receipt of a digital asset in exchange for goods, services, or another digital asset. The IRS also includes a broad, catch-all category stating taxpayers may need to report any other disposition of financial interests in a digital asset. This language appears to suggest that the agency is trying to provide some room for interpretation if it chooses to pursue litigation.
Is there anything else I should know about digital assets and taxes?
As noted above, federal agencies are not the only ones trying to navigate regulation of these assets. Lawmakers are also looking to add additional regulation. A group of lawmakers recently introduced a “slimmed down” version of the Responsible Financial Innovation Act originally introduced last summer. The law creates a regulatory framework for digital assets like cryptocurrency to encourage and promote responsible financial innovation while also protecting consumers from harm.
A prime example of the potential harms lawmakers aim to avoid in the future that catalyzed this type of legislation is the FTX debacle. FTX is one of the largest cryptocurrency exchanges. Founder Sam Bankman-Fried has received media attention for his role in the company’s failure and faces criminal charges connected to illegal business operations. FTX filed for relief through bankruptcy in November, leaving investors fighting for their returns.
The main takeaway: this area of law is evolving. Those who deal in digital assets are wise to stay abreast of these and other changes and make sure they follow applicable regulations. The attorneys at Goldburd McCone are experienced in tax issues like these and can provide legal counsel to help better ensure practices are inline with applicable law.