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News

IRS Adds Digital Asset Question to More Tax Forms

By:
S.J. Steinhardt
Published Date:
Jan 23, 2024

The IRS reminded taxpayers that they must answer a digital asset question on their tax forms and report all digital asset- related income when filing their 2023 federal income tax returns. The agency also announced that the question has been added to more forms this year.

The wording of the question, which appears at the top of Forms 1040, Individual Income Tax Return; 1040-SR, U.S. Tax Return for Seniors; and 1040-NR, U.S. Nonresident Alien Income Tax Return, was revised this year.

This question was also added to Forms 1041, U.S. Income Tax Return for Estates and Trusts1065, U.S. Return of Partnership Income1120, U.S. Corporation Income Tax Return, and 1120-S, U.S. Income Tax Return for an S Corporation.

Depending on the form, the digital assets question asks this basic question, with appropriate variations for corporate, partnership or estate and trust taxpayers: “At any time during 2023, did you: (a) receive (as a reward, award or payment for property or services); or (b) sell, exchange, or otherwise dispose of a digital asset (or a financial interest in a digital asset)?”

The IRS defines a digital asset as “a digital representation of value that is recorded on a cryptographically secured, distributed ledger or any similar technology.” Common digital assets include convertible virtual currency and cryptocurrency, stablecoins and non-fungible tokens (NFTs).

Anyone who files Forms 1040, 1040-SR, 1040-NR, 1041, 1065, 1120, 1120, and 1120S must check one box answering either “Yes” or “No” to the digital asset question, the IRS said. The question must be answered by all taxpayers, not just by those who engaged in a transaction involving digital assets in 2023.

The IRS has made crypto more of a priority in recent years, given the popularity of virtual currency such as Bitcoin and its use in hiding transactions from the traditional banking system, Accounting Today reported. The IRS Criminal Investigation unit has also focused more on crypto-related crime in coordination with tax authorities in other countries.

Taxpayers must check the "Yes" box if they:

● Received digital assets as payment for property or services provided;
● Received digital assets resulting from a reward or award;
● Received new digital assets resulting from mining, staking and similar activities;
● Received digital assets resulting from a hard fork (a branching of a cryptocurrency's blockchain that splits a single cryptocurrency into two);
● Disposed of digital assets in exchange for property or services;
● Disposed of a digital asset in exchange or trade for another digital asset;
● Sold a digital asset; or
● Otherwise disposed of any other financial interest in a digital asset.

In addition to checking the "Yes" box, taxpayers must report all income related to their digital asset transactions.

Taxpayers who merely owned digital assets during 2023 can check the "No" box as long as they did not engage in any transactions involving digital assets during the year. The "No" box can also be checked if activities were limited to one or more of the following:

● Holding digital assets in a wallet or account;
● Transferring digital assets from one wallet or account that the taxpayers own or controls to another wallet or account that the taxpayer owns or controls; or
● Purchasing digital assets using U.S. or other real currency, including through electronic platforms.

A set of frequently asked questions (FAQs) and other details are available on the IRS’s Digital Assets page.