Federal Tax

Taxation of Cryptocurrency and Other Digital Assets (Portfolio 190)

  • The Portfolio, Taxation of Cryptocurrency and Other Digital Assets, No. 190 covers the U.S. federal income taxation of digital assets, analysis of the 2023 proposed broker information reporting regulations for digital asset transactions (REG-122793-19 (Aug. 29, 2023)) and the new IRS draft Form 1099-DA intended for brokers to report information related to disposing of a digital asset.

Description

Since the inception of Bitcoin, we have witnessed a staggering increase of new decentralized protocols and associated digital assets, largely constructed using blockchain technology. These new protocols and digital assets have greatly expanded the universe of transactions in the blockchain and digital asset space. The number and types of market participants has correspondingly grown exponentially.

This Portfolio will explore the myriad tax considerations facing taxpayers that participate in transactions with digital assets. These transactions may be broadly grouped into two distinct categories. First, there are certain activities and transactions that are unique to digital assets such as mining, staking and participating in Decentralized Finance (“DeFi”) – an emerging financial technology built on a secure distributed ledger akin to those used by cryptocurrencies. In such cases, there are few if any tax rules that specifically address the precise type of activity. The tax professional must build a deep understanding of the underlying activity as a base for determining the appropriate tax consequences under general tax principles.

A second class of transactions involves more traditional activities, albeit with a new asset class. For example, we see investors, traders, dealers and custodians in the digital asset space. The tax rules that apply to many of these activities are fairly well-established, but the introduction of a novel asset class often leads to difficult questions regarding the application of these rules. For example, it is often necessary to determine if a digital asset may be characterized as a commodity or a security for a particular purpose, such as when applying the safe harbor for effectively connected income attributable to the activities of a trader of digital assets.

This Portfolio is organized along these lines. For circumstances where the activity is unique to digital assets, this Portfolio provides a description of the activity and generally sets forth the primary consideration for determining the appropriate tax consequences of such activity. For more traditional activities, the Portfolio briefly summarizes the relevant law and identifies the key issues that tax professionals must grapple with in applying that law. The types of transactions and activities are not always clear cut, but this general framework is often helpful when approaching activities and transactions that involve digital assets.

Table of Contents

I. Introduction
II. Overview of Digital Assets
III. Guidance to Date
IV. Tax Classification and Accounting Treatment
V. Dealing, Trading, Using and Investing in Digital Assets
VI. Selected Issues for Investment Entities
VII. Selected Digital Assets Tax Issues
VIII. Information Reporting and Tax Return Compliance
IX. International Tax
X. State Taxation
XI. Selected Tax Issues for Individuals
XII. Compensation and Employee Benefits

Rob Massey
Tax Partner
Deloitte Tax, LLP
Conor O’Brien
Tax Senior Manager
Deloitte Tax, LLP
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