Understanding the distinctions between digital asset types is critical for effective tax and estate planning. Each category has unique characteristics that impact how it is managed, taxed, and transferred to beneficiaries. Let’s explore the major classifications of digital assets and their specific planning considerations.
Fungible digital assets are interchangeable, with each unit identical in value and function to every other unit of the same type. These include:
From a tax perspective, fungible tokens are treated as property under IRS Notice 2014-21. This means each transaction potentially triggers capital gains or losses, requiring meticulous basis tracking. When these assets generate income through staking, yield farming, or other passive means, the tax implications become even more complex.
For estate planning, fungible assets present challenges in valuation, particularly for less liquid tokens. Your trustee must determine fair market value at death for step-up in basis purposes under IRC § 1014, which can be problematic for volatile assets or those with thin trading markets.
Non-fungible tokens represent unique digital items, with no two tokens being interchangeable. These include:
NFTs present specialized tax and estate planning challenges. Their unique nature makes valuation highly subjective. How do you price a one-of-a-kind digital masterpiece with no comparable sales? For creator-owned NFTs, future royalties may be classified as Income in Respect of a Decedent (IRD) under IRC § 691, but only if the right to receive those payments was fixed and enforceable at the time of death. Many NFT royalties—particularly those tied to smart contract resale terms—are contingent, speculative, or dependent on third-party marketplaces, making them less likely to qualify as IRD.
Personal digital assets have a connection to their creator or owner’s identity, often involving intellectual property rights:
For tax purposes, income from personal digital assets may be treated as ordinary income rather than capital gains. In estate planning, future income generated by personal digital assets may be considered IRD if it was fixed and payable at the time of death. The asset itself is not IRD and may qualify for a step-up in basis.
The intellectual property aspects of personal digital assets add another layer of complexity. Copyright inheritance follows different rules than the digital asset itself, potentially creating split ownership situations if not properly addressed in estate documents.
Impersonal digital assets have value independent of their owner’s identity:
These assets typically follow standard property tax treatment with basis tracking and capital gains implications. Their impersonal nature simplifies transfer planning but still requires careful documentation for fiduciaries.
Different digital asset types have distinct basis considerations that dramatically affect tax outcomes:
| Asset Type | Basis Determination | Step-Up Eligibility | Documentation Requirements |
| Cryptocurrencies | Acquisition cost plus fees (26 CFR § 1.1012-1) | Eligible for step-up in basis at death (26 U.S.C. § 1014) | Transaction records, exchange statements, wallet addresses |
| NFTs | Purchase price (if acquired) or typically zero basis if self-created | Eligible for step-up; royalties owed to creators may be IRD (26 U.S.C. § 691) | Purchase records, creation costs, royalty agreements |
| Creator Assets | Typically zero unless development costs were capitalized (IRC § 263) | Limited; income from future exploitation may be IRD (26 U.S.C. § 691) | Records of development expenses, capitalized costs, and revenue streams |
| DAO Tokens | Depends on acquisition method—purchase price, airdrop FMV, staking reward value, etc. | Eligible for step-up unless considered IRD; treatment varies based on token structure and use | Contribution records, governance documentation, and on-chain history |
Tracking basis for digital assets requires specialized approaches. Unlike traditional investments, which often have clear purchase records and broker statements, digital assets frequently involve multiple wallets, exchanges, and on-chain transactions that must be meticulously documented.
The classification of digital asset transactions as principal or income has significant implications for trust administration and beneficiary taxation:
These classifications directly impact how trust distributions are taxed under IRC § 643, which governs Distributable Net Income (DNI). A trustee must properly categorize digital asset transactions to fulfill fiduciary duties to both current and remainder beneficiaries.
Decentralized Autonomous Organizations (DAOs) present unique challenges as they can be structured in various ways with different tax implications:
Many DAOs default to partnership taxation, where:
Some DAOs elect corporate status, resulting in:
DAO tokens may be classified as securities under the Howey test, triggering:
For estate planning purposes, the classification determines how DAO interests are transferred at death and what tax obligations accompany them. Trustees must understand the governance rights associated with tokens and how to exercise them effectively.
The jurisdiction of your estate planning entities significantly impacts how different digital assets are treated:
| Jurisdiction | Cryptocurrency Advantages | NFT Advantages | DAO Advantages |
| Wyoming | DAO LLC statute, DAPT availability | Strong privacy laws, no state income tax | First legal framework for DAOs (Wyo. Stat. § 17-31-104-116) |
| Delaware | Flexible LLC laws, business courts | Strong asset protection | Corporate flexibility, established case law |
| Nevada | Strong asset protection, no state income tax | Privacy protections, favorable tax environment | Digital assets benefit indirectly from strong asset protection laws. |
| Florida | No state income tax, homestead protection | No estate tax, favorable trust laws | No personal income tax on distributions to Florida residents |
| California | Spousal basis adjustment in community property | Strong IP protections | Courts familiar with digital innovation |
Community property states like California and Texas offer a complete basis step-up for both spouses under IRC § 1014(b)(6), potentially doubling the tax benefit for jointly owned digital assets. Common law states, such as New York, provide individual step-up, but may have more stringent regulatory environments.
Different digital asset types require specific fiduciary powers to manage effectively:
Fiduciaries need explicit authority to:
Fiduciaries handling NFTs require powers to:
Managing DAO interests requires specialized powers to:
Estate planning documents must grant these specific powers to ensure fiduciaries can effectively manage digital assets after incapacity or death. The Revised Uniform Fiduciary Access to Digital Assets Act (RUFADAA) provides a framework, but explicit document language is essential.
Different digital assets call for tailored planning approaches:
Digital assets in trusts require careful tax planning to avoid the compressed trust tax brackets, which reach the highest rate (37%) at just $14,550 of income.
Consider a trust that receives $10,000 in DAO staking rewards and realizes $50,000 in gains from Bitcoin sales. Proper planning includes:
The classification of digital assets has a direct impact on every aspect of tax and estate planning. From basis determination to fiduciary powers, from principal/income allocations to jurisdictional advantages, each asset type requires specialized knowledge and planning approaches.
For effective planning:
By understanding the distinct nature of each digital asset type, you can create a comprehensive estate plan that preserves your digital wealth for future generations while minimizing tax burdens and administrative complications.
Disclaimer: This guide provides educational information only and does not constitute legal or tax advice. Please consult with qualified professionals regarding your specific situation before implementing any strategies discussed.
©
2025
Allegis Law, LLC. All Rights Reserved.
