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Digital Assets

Updated on January 5, 2024
Article byGayatri Ailani
Edited byRaisa Ali
Reviewed byDheeraj Vaidya, CFA, FRM

What Are Digital Assets?

Digital assets are anything in digital forms, possessing value and having an owner. It can act as a medium of exchange or a unit of account. Items like digital images, photos, audio, and video files exist digitally and are regarded as assets since they have monetary and personal value.

Digital Assets

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They are useful in many ways. Creators can sell the assets for profit, and digital asset investors get the opportunity to diversify their portfolios. Assets like cryptocurrencies provide a way to store and transfer funds avoiding dependence on financial institutions or other intermediaries, and crypto miners can profit from mining cryptos.

Key Takeaways

  • Digital assets definition portrays it as an asset present only in digital form. The asset has value and an owner; hence it is a digital representation of value.
  • They can function as a medium of exchange. Examples include images, audio files, and blockchain-based assets like Bitcoin.
  • Virtual currencies, stablecoins, and non-fungible tokens (NFTs) are significant types.
  • Cryptocurrencies come under digital asset classes, and the government does not issue cryptocurrencies.

Digital Assets Explained

Digital assets are any file type of value created, stored digitally, and owned by an entity. The owner will have access to it and possess usage rights. It can range from a simple asset to a complex asset. An example of a simple one is an image with its owner possessing the right to use it, and a complex one is a blockchain-based asset like Bitcoin. 

Virtual currencies and associated innovations broadened the digital assets investment domain. The first cryptocurrency was eCash, developed by American cryptographer David Chaum, and he implemented it through the company DigiCash in 1995. The decentralized digital currency or cryptocurrency Bitcoin and its underlying technology were introduced to the world in 2009. Nowadays, central banks of many nations are introducing centrally controlled digital currencies, the virtual money created by central banks known as CBDC (Central Bank Digital Currency). Its examples include China’s digital RMB and the Sand Dollar introduced by the central bank of the Bahamas.

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Example

Let us look at digital asset examples to understand the concept better:

  • Bitcoin: Bitcoin is the most popular decentralized digital currency which is not under the control of a central agency. It is a medium of exchange that is in digital form. Its acceptability as a global payment mechanism is increasing. For example, the number of vendors allowing Bitcoin transactions are increasing; hence Bitcoin usage to shop online is also rising. Users can store Bitcoin and make payments using Bitcoin wallet apps.
  • Data: Data is one of a marketer’s most valuable resources. Nowadays, marketing decisions influenced by data analytics are increasing. To evaluate and maximize return on investment in the present economic climate, marketers will need to rely more heavily on data, especially user data or consumer information accessible to them. Furthermore, marketers will find their work simpler and maximize each asset’s return on investment (ROI) by using easily available data to generate and optimize content that connects with customers.

Types

The significant types are as follows:

  • Virtual Currencies: Virtual currencies are unregulated digital currencies. It can be centralized or decentralized. Bitcoin, Ethereum, and Litecoin are examples.
  • StableCoins: A Stablecoin is a type of cryptocurrency linked to a reference or “stable” asset, such as gold, the US dollar, or a cryptocurrency. In comparison to unpegged cryptocurrencies, they are intended to reduce price volatility. 
  • Non-Fungible Tokens: NFTs are tokens or digital identifiers used to certify the ownership of unique items. These tokens are unique, cannot be copied, and are attached to specific assets present digitally. Its trading occurs in the NFT marketplaces.

Taxation

Legal taxation of digital asset transactions occurs. Therefore, these transactions may have to be disclosed by the taxpayer on his tax return. In selected situations, these assets can function similarly to a nation’s coin and paper money classified as legal tender or real cash. Still, they do not have legal tender status in many nations like the United States. Convertible virtual currency is a term the Internal Revenue Service uses to describe a digital asset comparable to or as a replacement for real money. One convertible virtual currency type is Bitcoin, which can be digitally traded between users and purchased for or exchanged into real currencies.

As per IRS rules, a taxpayer may owe taxes on the following transactions involving digital assets:

  • Sale
  • Exchanged for property, goods, or services
  • Exchange or trade of one for another of the same type
  • Receipt of it as payment for goods or services
  • Receipt of a new digital asset as a result of mining and staking activities
  • Receipt of it as a result of an airdrop
  • Using it to pay for goods or services
  • Any other disposition of financial interest in a digital asset
  • Receipt or transfer of it for free (without providing any consideration) that does not qualify as a bona fide gift

Digital Assets vs Cryptocurrency

The significant differences are as follows: 

  • The digital asset is present in digital form, has value, and has an owner. Cryptocurrency is an example. It is generally based on blockchain technology, and people use it to pay for things and as a digital asset investment option. 
  • There exist government-issued digital currencies, whereas the government does not issue cryptocurrencies. 
  • Examples of digital assets include images, videos, cryptocurrencies, NFTs, etc. Examples of cryptocurrencies include Bitcoin, Ethereum, Tether, Solana, etc.

Frequently Asked Questions (FAQs)

What is digital asset management (DAM)?

A centralized system for organizing and accessing media assets is established by DAM, a business process, and an information management technology. DAM systems manage, store, integrate, organize, and retrieve assets in the system.

Is Bitcoin a digital asset?

Virtual currency like Bitcoin is an example, and they are completely digital. However, Bitcoin is an intangible asset and lacks physical substance. 

Is an NFT a digital asset?

A non-fungible token, also known as an NFT, is a digital asset that certifies and represents the ownership of an item. It is a unique digital identifier that cannot be replicated. NFTs may be bought, sold, and traded since the ownership of each one is tracked on the blockchain and transferable by the owner.

This has been a guide to What are Digital Assets and its meaning. We explain its types, examples, taxation, and comparison with cryptocurrency. You may also find some useful articles here:

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