To many retail investors, cryptocurrency used to be the wild west of finance. Bitcoin gave an assurance of self-determination. NFTs provided a creative right. The stablecoins were said to be bridging old money and new money. But as the market matures, regulation does too.
The Internal Revenue Service was providing an appropriate reminder this week. Assuming you received digital asset-based income in 2025, you must report it. The message is not new. But it is firmer than ever.
Online Property, Not Money
The Internal Revenue Service defines digital assets as US taxable property, but not a foreign currency.
Hence, this classification is of importance. The Internal Revenue Service has defined a digital asset as a digitalised representation of value in a cryptographically secured, distributed registry, such as a blockchain, or in a technology related to such a registry. This implies that a digital asset can be obtained or sold through purchase, sale, transfer of ownership, or trading.
Among the definitions offered are digital assets with no material representation, such as digital currencies like Bitcoin, convertible virtual currencies, stablecoins and non-fungible tokens. In this regard, the IRS treats digital assets as property for tax purposes, and certain activities involving them can trigger taxable events. Thus, numerous exchanges involving the transfer or disposition of a digital asset can impose an income tax liability on the taxpayer.
What Qualifies as a Taxable Event?
Most traders are sure that tax is imposed only when cryptocurrency is sold for fiat currency. This is perceived differently by the IRS. If you earn profit from selling Bitcoin, it is taxable in most cases.
Trading one cryptocurrency for another may be taxable in most cases. More so, when you buy goods or services using cryptocurrency, you might be taxed on the fair market value of the asset on the date of purchase.
Sales of NFTs are taxed in a similar manner. The purchase and sale of an NFT will be subject to capital gains tax on the profit made by an individual when buying and selling an NFT at a profit. If an individual is paid in digital currency for services, the fair market value of the digital currency in U.S. dollars on the date of receipt is usually taxed as income.
The Significance of the Records Keeping
Taxpayers engaging in transactions involving digital assets should maintain accurate and complete records. But retail investors are more than likely to have difficulty with such a task.
Record the following information: the date when you made the asset purchase of a digital asset and the time of making the purchase; the nature of the digital asset which you are making purchase and purchase; the number of digital assets which you are purchasing; the reasonably priced value of the digital asset as of the date you are making purchase in US dollars; and any fee paid in consequence to make a purchase.
In determining whether there is a gain or a loss on disposing of a digital asset, you must know your basis on the same asset, which is usually the amount you paid for the asset, including all the costs incurred. At any later sale or other disposition of the asset, a deduction was taken against the fair market value thereof at the later disposition. The outcome is either a loss or a gain.
In the absence of proper documentation, any estimate of losses or gains may be challenged by the IRS. According to the IRS, it will be keen to enforce the rules for reporting digital assets and ensure that taxpayers keep accurate records of their transactions.
Increasing Disdain Towards Cryptocurrencies
With the rise of cryptocurrencies, they are subject to regulation. The IRS notice reflects a broader trend in regulating the financial sector: regulators will ensure that digital wealth does not escape the well-established tax framework.
This warning has practical consequences for individual traders. In case a person fails to declare cryptocurrency activities in his or her 2025 federal tax filing, s/he would risk punishment or further review by the IRS.
The IRS, a consumer-facing agency, has included cryptocurrency questions on tax returns in recent years.
The IRS has been attempting to clarify that taxpayers must correctly report all digital asset activities on their federal income tax returns.
Originally published on IBTimes UK
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