Cryptocurrencies, NFTs, and More: Digital Asset Tips for Tax Preparers

From cryptocurrencies like Bitcoin to NFTs and other blockchain-based tokens, digital assets present unique challenges—and opportunities—in tax compliance. Staying informed about digital assets and how they are treated for tax purposes is vital for tax professionals to serve their clients effectively.

What Are Digital Assets?

The IRS classifies digital assets as “any digital representation of value recorded on a cryptographically secured, distributed ledger (blockchain) or similar technology.”

What does that mean, exactly? For tax purposes, the main point is that digital assets are stored electronically and can be bought, sold, owned, transferred or traded—because they are considered property, not currency.

Common examples of digital assets include:

• Cryptocurrencies: Bitcoin, Ethereum, and other virtual currencies
• Non-Fungible Tokens (NFTs): Unique digital collectibles, art, or media
• Stablecoins and Utility Tokens: Often used for transactions or specific blockchain services

Clients engaging in digital asset transactions must report these activities accurately on their tax returns:

• Mining: Earning crypto by validating transactions
• Staking: Earning rewards for locking up crypto
• Airdrops: Free crypto distribution, usually as part of a promotion
• Forks (specifically hard forks): Creation of new tokens via blockchain split

How do I report digital assets on behalf of my clients?

The language surrounding digital asset events—such as mining, staking, air drops, and forks—can become overwhelming quickly. As far as taxes are concerned, reporting digital assets begins with a simple yes-or-no question on both individual and business tax returns:

At any time during the tax year, did you: (a) receive (as a reward, award or payment for property or services); or (b) sell, exchange, or otherwise dispose of a digital asset (or a financial interest in a digital asset)?

Note that “receive” does not include purchasing digital assets with real currency.

Also note that financial interest in a digital asset includes:

• Being recorded as the owner of a digital asset
• Having an ownership stake in an account that holds one or more digital assets, including the rights and obligations to acquire a financial interest
• Owning a wallet that holds digital assets

IRS Digital Asset Tax Rules for Taxpayers

Tax preparers should understand the key circumstances under which digital asset transactions become taxable.

• Capital Gains or Losses: When clients sell or trade cryptocurrencies or NFTs, they may face capital gains or losses based on the fair market value at the time of sale versus their cost basis.
• Payments with Cryptocurrency: Using cryptocurrency to purchase goods or services is considered a taxable transaction.
• Earnings from Digital Assets: Earnings from taxable events like mining, staking, airdrops, and forks are treated as income and must be reported accordingly.
• NFT Transactions: Regardless of whether the client is an NFT creator or collector, sales and trades can result in taxable income or capital gains.

Best Practices for Tax Preparers

To effectively support clients with digital asset tax compliance, it’s essential to prioritize several best practices.

Educate Clients on Recordkeeping. Encourage clients to maintain detailed records of all digital asset transactions, including transaction dates, amounts, cost basis, and fair market value.

Utilize the Correct Tax Forms. Not all digital asset information is reported on the same tax form:

1. Form 8949: Report capital gains and losses for digital asset transactions.
2. Schedule D: Summarize totals from Form 8949.
3. Schedule 1 or Schedule C: Report income from mining, staking, or NFT sales, depending on the nature of the income.

Present Potential Tax-Saving Strategies. Clients will likely be interested in the tax advantages of long-term capital gains versus short-term gains.

For example, digital assets are exempt from wash sale rules. According to the IRS, a wash sale occurs when you sell or trade stock or securities at a loss and within 30 days before or after the sale you:

• Buy substantially identical stock or securities,
• Acquire substantially identical stock or securities in a fully taxable trade,
• Acquire a contract or option to buy substantially identical stock or securities, or
• Acquire substantially identical stock for your individual retirement arrangement (IRA) or Roth IRA.

If you sell stock and your spouse or a corporation you control buys substantially identical stock, you also have a wash sale.

Since digital assets are exempt from these rules, losses could be strategically harvested.

Leverage Technology and Expertise. Invest in tax software solutions like Drake Tax® that integrate and streamline digital asset reporting.

Get the Tools You Need to Excel

As more clients invest in cryptocurrencies and NFTs, tax preparers are expected to provide clear guidance and ensure compliance with IRS requirements. By staying informed and proactive, you can position yourself as a trusted advisor in this growing niche.

Subscribe to our blog for the latest tax insights, and contact our sales team to learn more about how our professional Drake Tax® software is designed to simplify digital asset tax preparation and compliance.

Sources:

Article 15479 | Drake Tax Knowledge Base

Digital assets | Internal Revenue Service

Frequently asked questions on virtual currency transactions | Internal Revenue Service

Publication 550 (2023), Investment Income and Expenses | Internal Revenue Service

More on Digital Assets from Taxing Subjects:

Cryptocurrency and the Form 1040 | Taxing Subjects

IRS Clarifies Digital Assets Not the Same as Cash—Yet | Taxing Subjects

2023 Virtual Currency Survey Results [Infographic] | Taxing Subjects