Taxpayers, pay attention: IRS rules for digital asset income reporting are undergoing a slight update in 2023 for the 2022 tax year. Although the change revolves largely around terminology, keeping up with the current requirements is important to ensure you file your tax return correctly.
The Digital Asset Question: 2021 vs. 2022
The digital asset question of 2022 vs. the previous tax year includes slightly different terms. While in previous years, this question referred to “virtual currencies,” in 2022, the IRS used the broader definition of “digital assets.”
This year, the 1040 digital asset question specifies what it means to “receive” digital assets. The IRS also added the term “gift,” which it didn’t include in 2021.
However, the gist of the question remains the same: You must declare any digital assets or cryptocurrencies that you received, sold, exchanged, gifted, etc. And yes, everyone must answer the question by checking either “Yes” or “No” in the relevant box.
Where Does the Digital Asset Question Appear?
The question appears on the following IRS forms:
- 1040 (individual income tax return)
- 1040-SR (U.S. tax return for seniors)
- 1040-NR (income tax return for nonresident aliens)
What Counts as a Digital Asset According to IRS Rules for Digital Asset Income Reporting?
By the IRS definition, digital assets include:
- Convertible virtual currencies
- NFTs (non-fungible tokens)
- Stablecoins (cryptocurrencies that tie their value to different assets, like another cryptocurrency or fiat currency)
If you aren’t sure whether a specific asset counts as a digital asset, we suggest you consult a tax professional to avoid mistakes.
Who Should Check “Yes”?
You would usually have to answer “Yes” to the digital asset question if you:
- Received payment in digital assets for services or property
- Received an award or reward in digital assets
- Gained new digital assets from mining, blockchain branching, and other cryptocurrency-generating activities
- Sold digital assets
- Paid for services or property in digital assets
- Traded one digital asset for another
- Gave a digital asset as a gift
- Transferred your interest in digital assets in any other way
Who Should Check “No”?
If you don’t own any digital assets, you’ll check “No” when you answer the digital asset question. You can also answer “No” to this question if your digital asset activities only included the following:
- Keeping digital assets in an account or cryptocurrency wallet
- Moving digital assets between wallets or accounts you own
- Using fiat currencies to buy digital assets (even if you used a digital platform like Venmo or PayPal)
Reporting Digital Asset Income
If you checked the “Yes” box, you must also provide a detailed report of your digital asset transactions during 2022. This applies to:
- Investors who exchanged, transferred, or sold digital assets
- Employees who received wages in the form of digital assets
- Independent contractors who accepted digital assets as a payment
- Traders who transferred, sold, or exchanged digital assets
Use the IRS website to find the relevant digital asset form you must fill and file (Form 8949 and Schedule D for investors, Schedule C for independent contractors and traders, Form 709 for gifts, etc.)
Levy & Associates: Full-service Tax Consultancy To Help You Stay on Top of Tax Requirements
It can be tricky to keep up with ever-changing tax regulations, including IRS rules for digital asset income reporting. Avoid tax pitfalls by working with Levy & Associates, a full-service tax consultancy with a team of tax attorneys, former revenue officers, and other tax professionals. We help you navigate complex tax requirements and resolve issues like audits, liens, levies, penalties, and more.
Call 800-TAX-LEVY today to learn more about our tax services.