boltKey takeaways
- The IRS treats digital assets as property, so each sale, exchange or spend is a taxable disposition measured against the asset's basis.
- Staking rewards and other newly received tokens are generally ordinary income at fair market value when the taxpayer gains dominion and control.
- Brokers report gross proceeds on Form 1099-DA for sales from 2025, with basis reporting for covered assets acquired from 2026 onward.
- Funds face unsettled questions, including whether digital assets qualify for the trading safe harbor for foreign investors and for mark-to-market elections.
- Lot-level records of acquisition date, cost, wallet and fair value at each event are the foundation of accurate fund tax reporting.
In the United States, cryptocurrency and other digital assets are treated as property for federal income tax purposes. Selling them, exchanging one token for another, or spending them triggers a capital gain or loss measured against basis, while tokens received as compensation, mining or staking rewards are generally ordinary income when received. Funds that hold digital assets apply these rules through the usual partnership framework, with some important open questions layered on top.
This guide is written for fund managers, CFOs and LPs with digital asset exposure, whether through a dedicated crypto fund or a venture fund that holds tokens alongside equity.
The core rule: digital assets are property#
The IRS set out its basic position in Notice 2014-21 and has maintained it since: convertible virtual currency is property, not currency, for federal tax purposes. The Internal Revenue Code now defines "digital asset" broadly as any digital representation of value recorded on a cryptographically secured distributed ledger or similar technology (Section 6045(g)(3)(D)).
Practical consequences:
- Every disposition is a tax event. Selling for dollars, trading one token for another, and paying for goods or services all realize gain or loss.
- Gain or loss equals the amount realized (fair market value of what is received) minus adjusted basis.
- Holding period determines character. Assets held more than one year produce long-term capital gain or loss for investors.
- No currency exceptions. The small-transaction exclusion for foreign currency gains does not apply.
Basis and lot tracking#
Each acquisition is a separate lot with its own date and cost. Taxpayers may identify which units they sell if they keep adequate records; otherwise first-in, first-out applies. Since January 1, 2025, the IRS expects basis to be tracked wallet by wallet or account by account rather than across a taxpayer's whole holdings. Rev. Proc. 2024-28 provided a transitional safe harbor for allocating unused basis to wallets as of that date.
Income events#
| Event | Typical federal treatment |
|---|---|
| Buying tokens with dollars | No income; basis equals cost |
| Selling or swapping tokens | Capital gain or loss |
| Staking rewards | Ordinary income at fair market value when the taxpayer gains dominion and control (Rev. Rul. 2023-14) |
| Mining rewards | Ordinary income at fair market value when received; may be self-employment income for individuals in a business |
| Airdrop following a hard fork | Ordinary income if and when new tokens are received and controlled (Rev. Rul. 2019-24) |
| Tokens received for services | Ordinary income (compensation) at fair market value |
| Moving tokens between own wallets | Not a disposition |
| Lending, liquidity pools, wrapping | Treatment depends on facts; limited specific guidance |
Income items create basis equal to the amount included in income, so a later sale realizes gain or loss only on the change in value after receipt.
Worked example#
Assume a fund acquires 1,000 tokens at $20 each ($20,000 basis). Over the year it receives 50 staking reward tokens when the price is $24, and later sells all 1,050 tokens at $30.
| Item | Calculation | Amount |
|---|---|---|
| Staking income (ordinary) | 50 × $24 | $1,200 |
| Proceeds on sale | 1,050 × $30 | $31,500 |
| Basis: original lot | 1,000 × $20 | $20,000 |
| Basis: reward lot | 50 × $24 | $1,200 |
| Capital gain on original lot | $30,000 − $20,000 | $10,000 |
| Capital gain on reward lot | $1,500 − $1,200 | $300 |
The holding periods of the two lots differ, so they may produce gain of different character. The fund allocates all of these items to partners through K-1s.
Broker reporting: Form 1099-DA#
The Infrastructure Investment and Jobs Act of 2021 expanded broker reporting to digital assets, and final Treasury regulations created Form 1099-DA:
- Gross proceeds are reported for sales and exchanges on or after January 1, 2025.
- Basis is reported for "covered" digital assets, generally those acquired in an account with the broker on or after January 1, 2026.
Separate regulations that would have treated certain decentralized finance participants as brokers were nullified under the Congressional Review Act in April 2025. Custodial platforms remain subject to the reporting rules.
For funds, a 1099-DA is a reconciliation input, not a substitute for the fund's own records. Assets transferred in from self-custody or other platforms, and pre-2026 acquisitions, will not have basis reported. Individual taxpayers also answer a digital asset question on Form 1040.
Fund-level issues#
Most crypto funds are partnerships, so the pass-through rules in our venture fund tax guide apply. Several digital-asset-specific issues deserve attention.
Trader vs. investor status#
A fund that trades frequently may be engaged in a trading business rather than holding investments. That affects the deductibility of expenses for individual partners and interacts with the questions below.
Mark-to-market elections#
Section 475(f) lets traders in securities or commodities elect mark-to-market accounting, which converts gains and losses to ordinary and removes the need to track wash sales. Whether a particular digital asset is a "security" or "commodity" for this purpose is not settled for every token, so funds considering the election need careful analysis.
Wash sales#
The wash sale rule in Section 1091 applies to stock and securities. The IRS has not treated most digital assets as within its scope, and legislative proposals to extend it to digital assets have been introduced but, as of this writing, not enacted. Tokens that are themselves securities may be treated differently.
Foreign investors and the trading safe harbor#
Non-U.S. investors in U.S. funds normally rely on Section 864(b)(2), which treats trading in stocks, securities and certain commodities for one's own account as not a U.S. trade or business. Whether all digital assets fit within the safe harbor is not settled. Funds with foreign LPs often use offshore structures to manage the risk of effectively connected income.
Tax-exempt investors#
Unleveraged gains from holding digital assets are generally not unrelated business taxable income, but staking arrangements, lending, leverage and token investments through pass-through entities need case-by-case review.
Venture funds holding tokens#
Venture funds sometimes receive token warrants or token allocations alongside equity. Tokens are not stock of a C corporation and do not qualify for QSBS treatment. Token warrants and simple agreements for future tokens raise their own timing and character questions.
Valuation and accounting#
For financial reporting, digital assets need a consistent fair value policy: which pricing source, what time of day, how to handle thinly traded tokens, and when to apply discounts for lockups. Under U.S. GAAP, investment companies measure investments at fair value, and since ASU 2023-08 other entities holding in-scope crypto assets also measure them at fair value through net income. The same fair values feed tax reporting for income events such as staking rewards. See portfolio valuation and NAV.
Recordkeeping checklist#
- Record every lot with acquisition date, quantity, cost, wallet or account, and source.
- Capture fair market value at the moment of each income event.
- Keep a documented, consistent lot-relief method.
- Reconcile on-chain wallet balances to the fund ledger monthly.
- Reconcile broker 1099-DA forms to internal records each year.
- Document positions on unsettled questions and revisit them as guidance develops.
Digital asset tax guidance continues to change, so confirm treatment of specific transactions with a tax adviser.
How Privatis helps#
Privatis keeps fund holdings on a double-entry general ledger with period close, supports policy-based portfolio valuations and NAV, and delivers K-1s and capital account statements through the LP portal. An audit trail records every valuation and journal change, which helps when lot-level records and fair values must be supported to auditors and tax preparers.