Digital asset taxation: 2023 update

Digital assets continue to be a significant, but volatile, part of the financial system, with a market capitalization of approximately $1 trillion in 2023 (down from the $3 trillion value in November 2021) and an estimated 16% of adult Americans having purchased some form of digital asset. Given the magnitude of the area, multiple government agencies are tackling the impact of digital assets on everyday life.

There is a bipartisan group of senators sponsoring a bill, the Digital Asset Anti-Money Laundering Act, that would, among other provisions, expand FBAR (Report of Foreign Bank and Financial Accounts) filings to include digital asset holdings. Also introduced in the Senate is the Lummis-Gillibrand Responsible Financial Innovation Act, which includes a provision that states mining and staking rewards would not be included in gross income until the year they are sold or otherwise disposed of, essentially reversing current IRS guidance on the taxability of both validation mechanisms. On the other side of Capitol Hill, the House of Representatives would expand oversight and develop a regulatory framework of cryptocurrency in a bill passed out of the Financial Services Committee. The Securities and Exchange Commission and the Commodity Futures Trading Commission are each developing rules and jockeying for regulatory oversight responsibility around digital assets. Plus, even the Federal Bureau of Investigation has published two public service announcements around nonfungible tokens and cryptocurrencies.

However, while the world of digital assets continues to evolve, there is limited guidance on which taxpayers can rely in order to determine how their activity in this space is handled for tax purposes. This article covers material developments of digital asset taxation during the 2023 year, including various regulatory guidance, such as staking income and other clarifications. Please see our Sept. 6, 2023 alert on digital asset reporting for information on how brokers and taxpayers will be impacted by these proposed rules. Additionally, further details on the ever-changing world of digital asset taxation can be found in our 2022 year-end tax planning letter.