How the US taxes cryptocurrency and NFTs

Yes. Cryptocurrency is treated as property for US Federal income tax purposes. If an individual sells or exchanges cryptocurrency (i.e. virtual currency held as a capital asset) for other property, including for goods or for another virtual currency, that event is a recognition transaction, and a capital gain or loss will be recognized.

An individual’s gain or loss will be the difference between the individual’s cost basis (i.e. the individual’s initial capital investment in an asset) in the virtual currency and the amount the individual received in exchange for the virtual currency.

The above-described tax treatment applies to an individual who holds the cryptocurrency as a capital asset. If the cryptocurrency is held by a trader (as defined below), a different US tax regime, as described in Question 2 could apply.

Mark to market (MtM) is an accounting method of valuing assets and liabilities based on their current market value rather than their historical cost. It requires the deemed sale of assets at year-end, resulting in ordinary income or loss (as opposed to the normal realization rules that result in a gain or loss, ordinary or capital, depending on the character of the asset when there is an actual sale or disposition of the asset).

Section 475 of the US Internal Revenue Code (the Code) permits MtM accounting for eligible electing taxpayers, to include securities dealers, electing commodities dealers and securities and commodities traders. A Section 475 election converts income and losses from capital gains and losses to ordinary income and losses, and any opportunity to defer income recognition is eliminated. The MtM method does not apply to investors; investors must treat all gains and losses for investment activities as capital.

The eligibility requirements make it essential to understand how the Code defines (1) dealers, traders and investors and (2) securities and commodities.

Dealer. A taxpayer who regularly purchases from, or sells to, customers, or regularly offers to enter into, assume, offset, assign or otherwise terminate positions in securities with customers in the ordinary course of a trade or business. In the context of commodities, this definition includes dealers of physical inventories as well as derivatives. The fundamental concept is that dealers’ transactions must be with customers.

Trader. A trader (and an investor) trade on their own behalf rather than on behalf of customers. There is a great deal of controversy as to whether a taxpayer is a trader or an investor. A trader is a taxpayer who, as a full-time endeavour occurring throughout the entire year, buys and sells for his own account as part of his trade or business. A trader’s trading strategy must attempt to catch the swings in the daily market movements and the trades must be frequent, regular and continuous.

Investor. A taxpayer who buys and sells for his own account but not as part of a trade or business and takes long-term strategic positions.

Securities. The term “security” is broadly defined to include a share of stock; a partnership interest; a beneficial interest in a trust; a note, bond, debenture, or other evidence of indebtedness; and certain other contracts or positions.

Commodities. Property of a kind customarily dealt in on an organized commodity exchange” where transactions of its kind are customarily consummated at such place, including actual commodities and commodity futures contracts.

Currently, there is no clear answer as to whether the MtM method applies to convertible virtual currencies because there has not been a determination under US tax law whether convertible virtual currency is a security, a commodity, or something else. Even if convertible virtual currency were a security or a commodity, the MtM method only could apply to certain dealers and certain traders (including individuals) and not to investors.

There are both benefits and detriments to a taxpayer if convertible virtual currency were to be subject to the MtM method.

Yes, corporations are subject to taxation on gains from the sale of convertible virtual currencies.

Because convertible virtual currency is treated as property and not money, the use of convertible virtual currency as payment for goods or services is a taxable event. If you pay for a service using virtual currency that you hold as a capital asset, then you have exchanged a capital asset for that service and will have a capital gain or loss.

Your gain or loss is the difference between the fair market value (FMV) of the services you received over your adjusted cost basis in the virtual currency exchanged.

The IRS views cryptocurrency mining as a taxable activity.

When a taxpayer successfully “mines” convertible virtual currency, the FMV of the virtual currency as of the date of receipt is included in gross income as ordinary income.

Airdropped tokens are treated as ordinary income at the time of receipt. The amount treated as ordinary income is the FMV of the airdropped tokens.

See also Question 9 below for the treatment of airdropped tokens in connection with a hard fork.

A "proof of stake claim" refers to a participant's assertion that they have staked their cryptocurrency in a network, thus demonstrating their ownership and commitment to the blockchain's security. This stake, or locked-up cryptocurrency, gives that person a claim on the right to validate transactions and add new blocks to the blockchain, earning rewards for successful validation.

Here's a more detailed breakdown:

The IRS position, expressed in a Revenue Ruling (Rev. Rul 2023-14) relating to staking is as follows:

If a cash-method taxpayer stakes cryptocurrency native to a proof-of-stake blockchain and receives additional units of cryptocurrency as rewards when validation occurs, the FMV of the validation rewards received is included in the taxpayer's gross income in the taxable year in which the taxpayer gains dominion and control over the validation rewards.

The FMV is determined as of the date and time the taxpayer gains dominion and control over the validation rewards.

The same is true if a taxpayer stakes cryptocurrency native to a proof-of-stake blockchain through a cryptocurrency exchange and the taxpayer receives additional units of cryptocurrency as rewards because of the validation.

The tax characterization of staking rewards has drawn extensive commentary, and there is a divergence of opinions regarding the proper US Federal tax treatment. One view is that staking rewards are gross income when received, as expressed in the revenue ruling above. A divergent view is that staking rewards are not taxable upon receipt and that the IRS ruling that staking rewards are taxable income is inconsistent with existing precedents.

In Jarrett v United States, No. 3;21-cv-00419 (M.D. Tenn 2021), a taxpayer sought to obtain clarification as to the US tax treatment of income from staking. The key issue was whether creating tokens from proof of stake constitutes taxable income to the validator at the date the rewards were received. The taxpayer argued that self-generated staking rewards could not be considered taxable income under US Federal tax law; rather, similar to an artist or a baker, the creation of art or the baking of a cake is not taxable income until the item is sold. The IRS offered to issue the taxpayer a refund, but they refused; subsequently, the court dismissed the case, so, to date, there is no judicial resolution on this issue, but only the IRS position, stated in a Revenue Ruling₄, that staking results in taxable income at the time staking rewards are generated.

The tax treatment of lending in cryptocurrencies is a complex topic. There are two main types of crypto lending platforms, centralized and decentralized.

Centralized Exchanges.

These operate more like traditional banks. They act as intermediaries between lenders and borrowers, providing a platform for users to lend and borrow cryptocurrencies. Centralized platforms often provide higher compensation rates and require borrowers to provide collateral to access a crypto loan.

US Federal Tax Treatment.

• It is not entirely clear whether lending convertible virtual currency on a centralized exchange is a taxable event. Proponents for non-taxation argue there is no disposal of crypto assets. However, the IRS has indicated that it will not rule in that area.
• The compensation (crypto rewards) received by the lender is taxable as ordinary income.

Decentralized Exchange (DeFi).

Eliminates the need for a central authority, allowing for peer-to-peer transactions. Lenders operate on blockchain technology and use smart contracts to facilitate transactions. Here, the convertible virtual currency is part of a pool; upon a deposit of convertible virtual currency into a pool, the lender receives a separate token that represents ownership in the pool.

US Federal Tax Treatment.

• There is an initial question relating to the characterization of these transactions:
  Should the lending participants be treated as participating in digital asset lending transactions, with the DeFI token representing the digital asset loan, in which case the transaction can be equated with a loan on a Centralized Exchange, OR
  Should the lending participants be treated as making a taxable exchange of the transferred assets for the DeFi token, in which case the below consequences would apply?
  • Tax consequences would apply since a trade of one convertible virtual currency for another is a taxable disposal.
  • Lending crypto on a decentralized exchange may result in ordinary or capital gains taxation, depending on the platform used and how it operates.
  • When an investor loans convertible virtual currency on a DeFi platform, two categories of income are earned, (i) interest on the convertible virtual currency and (ii) platform rewards.
  • Interest received on the loan of a convertible virtual currency is ordinary income and subject to taxation, as would be the case with respect to platform tokens.
  • The repayment of the loan and return of collateral likely should not be a taxable event, but that conclusion is not entirely clear.
  • If a borrower were not to repay the loan, then the platform could liquidate the borrower’s holding to recover the loan amount with interest; the liquidation would be treated as a disposal of assets and result in capital gains taxation to the borrower.
  • If the value of the collateral were to decrease below the platform limit, that would be treated as a disposal of assets and the borrower would be subject to capital gains taxation.

As a result of the foregoing uncertainties, it is essential that convertible virtual currency loans and transactions are tracked, and that all transactions are recorded in terms of value and changes daily.

Hard fork. A hard fork occurs when a cryptocurrency undergoes a protocol change resulting in a permanent diversion from the legacy distributed ledger. This may result in the creation of a new cryptocurrency on a new distributed ledger in addition to the legacy cryptocurrency on the legacy distributed ledger.

When a cryptocurrency owner receives cryptocurrency from an airdrop (a distribution of cryptocurrency to multiple taxpayers’ distributed ledger addresses) following a hard fork, the cryptocurrency owner will have ordinary income equal to the FMV of the new cryptocurrency when it is received, which is when the transaction is recorded on the distributed ledger, provided the cryptocurrency owner has dominion and control over the cryptocurrency so that the cryptocurrency owner can transfer, sell, exchange, or otherwise dispose of the cryptocurrency.

If a cryptocurrency owner went through a hard fork, but did not receive any new cryptocurrency, whether through an airdrop or some other kind of transfer, taxable income does not arise.

Soft fork. A cryptocurrency owner does not recognize taxable income when a cryptocurrency undergoes a protocol update with no change to the owners’ cryptocurrency.

A services provider, irrespective of whether an employee or an independent contractor, derives ordinary income for services if paid in convertible virtual currency.

The amount of taxable income is the FMV of convertible virtual currency, measured in US dollars, on the date of receipt. (In an on-chain transaction₅, the services provider receives the virtual currency on the date and at the time the transaction is recorded on the distributed ledger.)

If the services provider is an employee, the payment constitutes wages, subject to Federal income tax withholding, Federal Insurance Contributions Act (FICA) tax, and Federal Unemployment tax Act (FUTA) and is reported on IRS Form W-2, Wage and Tax Statement.

If the service provider is an independent contractor, the income received is self-employment income subject to self-employment tax and reported on IRS Form 1099-NEC.

The services provider obtains a tax basis in the convertible virtual currency equivalent to the FMV of the convertible virtual currency, in U.S. dollars, when the convertible virtual currency is received. The tax basis, as well as the holding period₆, are important for purposes of determining gain or loss and the rate of tax upon a subsequent disposition of the convertible virtual currency.

Donee of a Gift.

The recipient of a gift of virtual currency is not taxable on the value of the virtual currency when received.

Income (or loss), however, may be recognized upon the subsequent sale, exchange or disposition of that virtual currency. Therefore, it is important for the donee of a gift of virtual currency to ascertain the tax basis and holding period of virtual currency in the event of a subsequent disposition.

A donee’s tax basis in virtual currency received as a gift differs depending on whether gain or a loss is derived upon a disposition.

For purposes of determining whether there is a gain, the tax basis is equal to the donor’s basis immediately prior to the gift, plus any gift tax the donor paid on the gift.

For purposes of determining whether there is a loss, the tax basis is equal to the lesser of the donor’s tax basis immediately prior to the gift and the FMV of the virtual currency at the time of the gift. In the absence of relevant documentation substantiating the tax basis, the IRS considers the tax basis to be zero.

The holding period of gifted property includes the time that the virtual currency was held by the donor of the gift. If there is no documentation substantiating the donor’s holding period, the donee’s holding period begins the day after receipt of the gift.

Tax Reporting for Certain Foreign Gifts. If a US individual receives either a lifetime gift or an inheritance from a foreign person in excess of $100,000, the US person does not derive income, but the US donee is required to file IRS Form 3520 (Annual Return to Report Transactions with Foreign Trusts and Receipts of Certain Foreign Gifts), by the 15th day of the fourth month following the end of that person’s taxable year, subject to extension. If Form 3520 is filed late, or, if the information provided is incomplete or incorrect, the IRS may determine the income tax consequences of the receipt of such foreign gift or bequest, and the donee may be subject to penalties if the donee does not have reasonable cause for the late, incomplete or incorrect filing.

Donor of a Gift.

Gift tax rates range from 18% to 40%. However, there are several exclusions and exemptions.

The gift tax rules differ for a US citizen/domiciliary from that of non-US citizen/non-US residents.

US citizens/permanent residents are subject to gift taxation on all lifetime gifts, regardless of where the property is located, subject to certain exclusions and exemptions.

Non-US persons who are not domiciled in the United States are only subject to the US Federal gift tax on the transfer of real property and tangible personal property situated in the US. Significantly, for this class of individual, the gift tax does not apply to any transfer of intangible property. In that regard, the US situs rules for location of the cryptocurrency are not yet developed.

Exclusions and Exemptions (Illustrations)

The IRS allows an individual to gift a specific amount of assets or property tax-free. The 2025 annual gift tax exclusion is $19,000. This means an individual can give up to $19,000 to anyone without having to pay any US Federal gift tax or file a gift tax return.

Gifts between spouses, both of whom are US citizens are non-taxable, and no gift tax return is required to be filed.

Gifts by US citizen spouse to a non-resident spouse (i.e. a non-US person spouse) up to an amount not in excess of $190,000 are non-taxable, and no US Federal gift tax return is required to be filed.

In 2025, there is a lifetime exemption of $13.99 million (but the donor is required to file US Federal gift tax return). This amount applies to lifetime and testamentary gifts.

In-game Awards.

Any cryptocurrency earned through gaming is considered taxable income and must be reported on a US tax return. Further, since cryptocurrency is treated as property, any subsequent gains or losses from selling, or exchanging such cryptocurrencies would be subject to capital gains tax, which will be long-term or short- term depending on the holding period for the crypto.

No, cryptocurrency swaps do not qualify for IRC Section 1031 like-kind exchanges₇.

No. There is no US Federal transfer tax imposed on the sale or exchange of cryptocurrencies.

On federal income tax returns, a taxpayer must answer “Yes” or “No” to a question about digital assets. The question for 2024 tax returns is as follows:

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)?

For this purpose, a digital asset is any digital representation of value recorded on a cryptographically secured, distribution ledger(blockchain) or similar technology. Examples of digital assets are convertible virtual currencies and cryptocurrencies and NFTs.

A version of the question appears on income tax returns, including, for individuals (both US and non-US), US Corporations, US Partnerships, and US Estates and Trusts.

Whether the answer to the digital asset question is “Yes” or “No” depends on whether a taxpayer had digital asset transactions.

When to Check “Yes”:

• Received digital assets for:
  • Payment for property or services provided
  • A reward or award
  • Mining, staking and similar activities
  • An airdrop as it relates to a hard fork
• Disposed, sold, exchanged or transferred ownership of digital assets:
  • For another digital asset
  • For US dollars or other currency
  • In exchange or trade for property, goods or services in any amount
  • By paying a transfer fee with digital assets
  • By a transfer of ownership or financial interest
• A taxpayer has a has a financial interest in a digital asset if the taxpayer:
  • Is recorded as the owner of a digital asset
  • Has an ownership stake in an account that holds one or more digital assets, including the rights and obligations to acquire a financial interest
  • Owns a wallet that holds digital assets

When to Check “No”:

• Did not own any digital assets
• Only owned or held digital assets in a wallet or account, but did not engage in any digital asset transactions during the year
  • E.g. HODLing (slang for “hold on for dear life”, i.e. buy-and-hold indefinitely crypto even if value were to increase)
• Purchased, but did not sell, digital assets using US or other real currency, including through electronic platforms
• Transferred digital assets from one wallet or account the taxpayer owns or controls to another wallet or account the taxpayer owns or controls

Reporting of Digital Asset Transactions

• If a taxpayer has a digital transaction, the taxpayer must report that transaction irrespective of whether that transaction results in a taxable gain or loss.
• If a taxpayer had a digital asset transaction, it is important for the taxpayer to maintain records that are sufficient to establish the positions taken on tax returns.

For more details on this, please see IRS release https://www.irs.gov/filing/digital-assets#about.

Yes, see Question 14.

Apart from taxpayer reporting, the IRS has finalized regulations relating to the first codified US tax law focusing on information reporting of digital assets by digital asset brokers. Gross proceeds are reported for digital asset transactions on or after January 1, 2025, with brokers required to file IRS Forms 1099-DA (Digital Asset Proceeds from Broker Transactions) for such transactions beginning in 2026. However, brokers are only required to report the basis for digital assets that are acquired by, and held with, that broker on or after January 1, 2026 (with no requirement for retroactive tracking by brokers).

Regulations that would have applied broker reporting to so-called decentralized finance (DeFi) a term primarily applied to transactions of digital assets that do not involve a traditional intermediary, like a trading platform provided by a registered company, were repealed by the Congressional Review Act (CRA), reflecting the policy of the Trump Administration to do away with burdensome regulations₈. Critics of these regulations had argued that these regulations were fundamentally unworkable" because DeFi platforms operate through automated code on blockchains without human intervention or visibility into user identities.

The United States does not have a VAT.

There is no IRS guidance on the tax treatment of ICOs. The proceeds of an ICO to a domestic issuer generally constitutes taxable income, since ICOs generally do not qualify for tax-free treatment under US tax law, unlike conventional methods of raising capital, such as an initial public offering (IPO). That is because ICOs involve the production of fresh tokens that are issued to investors in exchange for cryptocurrencies or fiat currency which generally do not represent the rights of traditional stock. There are several possible methods to achieve income deferral. A US issuer also could use a non-US company to undertake an ICO, but that would raise several other complexities.

The United States does not have a VAT.

There is no Federal stamp tax today, except in limited circumstances and none are applicable to ICOs.

An NFT is a unique digital identifier that is recorded using distributed ledger technology and may be used to certify authenticity and ownership of an associated right or asset. The IRS approach to NFT taxation involves categorizing NFTs as property or collectibles, with significant implications for creators and investors.

Creation of NFT

The creation of an NFT is not a taxable event. However, the “minting”₉ of an NFT can be a taxable event if there is a cost involved to mint.

Minting an NFT, which occurs after the NFT is created, requires going through the process of creating a unique digital asset on a blockchain. Once an NFT is minted, it is stored in a decentralized database or ledger. By minting an NFT, the creator essentially is publishing a one-of-a-kind digital token that represents ownership or proof of authenticity of a digital item such as artwork, music, video, or any other digital file that can easily be bought or sold through the blockchain.

NFT creators are of two types: first, hobby creators who mint NFTs for fun and second, professional creators who mint NFTs as a full-time trade or business. Tax reporting NFT transactions is different for hobby creators and professional creators.

Sale of NFT

Hobbyist. A hobbyist who created an NFT derives income determined by reference to the difference between the hobbyist’s cost basis and the FMV of the sales price.
The rate of US Federal income tax depends on whether the NFT is a “collectible” and if not, the rate of taxation depends on how long the NFT was held.

• Short-term capital gains (assets held one year or less) are taxed at the regular income tax rate of 10% to 37%.
• Long-term capital gains (asset held more than one year) range from 0% to 20-%.
• The IRS will consider some NFTs as “collectibles,” taxable at a 28% rate, if held for over a year.
• The IRS intends to determine when an NFT is treated as a collectible by using a "look-through analysis."
• Under the look-through analysis, an NFT is treated as a collectible if the NFT's associated right or asset falls under the definition of collectible in the Code.
• For example, a gem is a collectible, therefore, an NFT that certifies ownership of a gem is a collectible while an NFT’s associated right to develop a plot of land is not. See Notice 2023-27.
• The hobbyist must file a US Federal income tax return reporting income from the sale, or exchange of NFTs and quarterly estimate tax payments may be required.

Professional Creator.₁₀ An individual artist who is in the trade or business of creating, minting and selling NFTs.

• Recognizes ordinary income or loss upon the disposition of an NFT.

• Is subject to tax at the ordinary income tax rates (10% to 37%) on income received reduced by ordinary and necessary business expenses.

• Is subject to self-employment tax (which is like the Social Security and Medicare taxes withheld from the pay of most wage earners) on net income over $400 at a 15.3% rate.

• The professional creator must file a US federal income tax return reporting income and make quarterly estimated tax payments.

  If a creator of a NFT were to receive royalites, such income likely would be considered ordinary income, with possible self-employment tax considerations.

Investor

• Purchasing NFTs. An investor has a taxable capital gain or loss if the investor uses crypto to purchase the NFT.
• Sale of NFT.
  • Gain. An investor may have a capital gain upon a sale or disposition of an NFT, depending on the holding period.
  • Loss. The investor can offset gains and some income otherwise realized. If an individual investor realized losses for a given tax year that exceed the realized gains, up to $3,000 of the remaining losses can be deducted from the taxpayer’s taxable income. If net losses exceed a $3,000 limit, the remainder can be carried forward to future years.

See response to Question 20 and discussion of professional creator. The corporate Federal income tax rate of 21% applies to the income from the disposition of an NFT.

No, NFTs are digital assets and taxed under the rules applicable to those types of assets; however, the IRS is considering taxing certain NFTs as collectibles, see Question 20 above.

No.

NFTs are digital assets, see discussion in Question 11.

No, NFTs are digital assets, see answer to Question 13.

Yes. NFTs are digital assets, see discussion in Question 14.

No.

The US does not have a VAT.