Questions regarding the taxation of cryptocurrency (crypto) can be complicated. Although the IRS addresses crypto transactions for federal income tax purposes, many states have not yet provided any income tax or sales and use tax guidance. Before diving into how states currently treat the taxation of cryptocurrency transactions, here’s a quick review of how the IRS defines a few key terms scattered throughout the article. “Digital assets” are broadly defined as any digital representation of value which is recorded on a cryptographically secured distributed ledger or any similar technology. According to the IRS, a digital asset (e.g., virtual currency, cryptocurrency, or crypto) is treated as property for federal tax purposes. Digital assets include:
- Convertible virtual currency and cryptocurrency
- Stablecoins
- Non-fungible tokens (NFTs)
Digital assets are not real fiat currency (a currency backed by the government that issued it rather than a physical commodity such as gold, silver, etc.). A digital asset that has an equivalent value in real currency, or acts as a substitute for real currency, is referred to as “convertible virtual currency.” A cryptocurrency is an example of a convertible virtual currency that can be:
- Used as payment for goods and services
- Traded digitally between users
- Exchanged for or into real currencies or digital assets
According to the IRS, cryptocurrency is a type of virtual currency that uses cryptography to secure digitally recorded transactions on a distributed ledger, such as a blockchain.
Full story : Cryptocurrency and state legislation: the current state of crypto state taxes in 2023.