Cryptocurrency and NFT Taxation: A Guide for Taxpayers
Digital Asset Transactions: Report or Risk Penalties
In recent years, the Internal Revenue Service (IRS) has emphasized the importance of reporting digital asset transactions on tax returns. Cryptocurrency and non-fungible tokens (NFTs) are considered taxable income, and failure to disclose can result in penalties.
Tax Implications of Digital Assets
Income generated from digital asset sales, exchanges, or mining is subject to tax. The IRS treats these transactions as property sales, with capital gains or losses depending on the holding period and asset value changes.
Determining Fair Market Value
For accurate tax reporting, taxpayers need to determine the fair market value of their digital assets at the time of transactions. Cryptocurrency explorers and blockchain indices provide reliable estimates, which the IRS accepts as evidence.
New Tax Considerations for Bitcoin
In 2021, the IRS issued legal memos outlining specific tax consequences for bitcoin holders. These include income recognition on hard forks and airdrops, as well as characterization of transaction expenses as capital or ordinary.
Reporting Digital Asset Transactions
When filing tax returns, taxpayers must answer a question regarding digital asset ownership. Failure to check "yes" can result in an inaccurate return and potential penalties. It's crucial to disclose all income related to digital assets, regardless of the amount.
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