Now that tax season is under way, the IRS is reminding taxpayers that they need to keep reporting all digital asset income.
The IRS noted that a question about digital asset income 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. The agency updated the terminology for these 2022 income tax forms, replacing "virtual currencies " with "digital assets." It also expanded and clarified the instructions for answering the question. All taxpayers must answer the question regardless of whether they engaged in any transactions involving digital assets.
The revised question for the 2022 tax year asks: "At any time during 2022, did you: (a) receive (as a reward, award or payment for property or services); or (b) sell, exchange, gift or otherwise dispose of a digital asset (or a financial interest in a digital asset)?"
The IRS defines "digital asset" as "a digital representation of value which is recorded on a cryptographically secured, distributed ledger, noting that common digital assets include convertible virtual currency and cryptocurrency, stablecoins and nonfungible tokens (NFTs).
The IRS offered a list of circumstances in which taxpayers should check the "Yes" box. Taxpayers must check the "Yes" box if they:
• Received digital assets as payment for property or services provided;
• Transferred digital assets for free (without receiving any consideration) as a bona fide gift;
• 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.
The IRS also offered a list of circumstances in which taxpayers can check the "No" box. The agency said that taxpayers "who merely owned digital assets during 2022 can check the 'No' box as long as they did not engage in any transactions involving digital assets during the year. They can also check the 'No' box if their 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 they own or control to another wallet or account they own or control; or
• Purchasing digital assets using U.S. or other real currency, including through electronic platforms such as PayPal and Venmo.
The IRS also provided information about how to report income related to their digital asset transactions.
The agency said that "an investor who held a digital asset as a capital asset and sold, exchanged or transferred it during 2022 must use Form 8949, Sales and other Dispositions of Capital Assets, to figure their capital gain or loss on the transaction and then report it on Schedule D (Form 1040), Capital Gains and Losses, or Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, in the case of gift.
The IRS also said that employees paid with digital assets "must report the value of assets received as wages. Similarly, if they worked as an independent contractor and were paid with digital assets, they must report that income on Schedule C (Form 1040), Profit or Loss from Business (Sole Proprietorship). Schedule C is also used by anyone who sold, exchanged or transferred digital assets to customers in connection with a trade or business."
For more information, taxpayers and prepares can see page 15 of the Tax Year 2022 1040 (and 1040-SR) Instructions. For a set of frequently asked questions (FAQs) and other details, they can visit the Digital Assets page on IRS.gov.