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This whitepaper explores the federal income tax treatment of digital assets, the term that the IRS uses to refer to virtual currencies and non-fungible tokens (NFTs).¹

For the virtual currency market, 2022 proved to be a turbulent year, with Bitcoin prices dropping more than 60% and the collapse of crypto exchange FTX. However, the words and actions of major financial firms, the Internal Revenue Service (IRS), and the federal government support the view that digital assets will continue to play an important role in financial markets and beyond.²

¹ See “Digital Assets,” IRS, . While the term digital asset can also encompass other items (such as personal data stored online, social medial accounts, financial accounts accessed online, loyalty programs, and domain names), for purposes of this whitepaper the term means virtual currencies and NFTs since those are the two main categories that the IRS has identified.

² See, e.g., Will McCurdy, “BlackRock CEO Says ‘Next Generation for Markets’ Is Tokenization,” Decrypt, December 1, 2022, ; Michael del Castillo, “KKR Blockchain Access To $4 Billion Fund Opens Door to Crypto Investors,” Forbes, September 24, 2022, ; Richard Vanderford, “IRS Sees Crypto Companies as Potential Crime-Fighting Partners,” Wall Street Journal, January 3, 2023, (citing the acting special agent in charge of the IRS Criminal Investigation’s New York as stating that “[c]ryptocurrency is here to stay. As far as I’m concerned, it isn’t going anywhere anytime soon and it’s becoming more legitimate.”); “Wyden, Crapo Solicit Policy Input on Taxation of Digital Assets,” United States Senate Committee on Finance, July 11, 2023, .