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Should Taxpayers Continue To Report All Income From Digital Assets?

 
As the 2023 income tax return season is underway, an Internal Revenue Service (IRS) publication from this week reminded taxpayers of their obligation to report all income related to digital assets, and to honestly answer a question regarding their engagement with digital assets on their 2022 federal income tax returns.

This is a continuation from last year’s tax return forms, which queried taxpayers with a similar question. A change to this year’s tax returns is that the term “digital assets” replaces the term “virtual currencies.”

The questions regarding digital asset ownership appears on Forms 1040, Individual Income Tax Return; 1040-SR, U.S. Tax Return for Seniors; and 1040-NR, U.S. Nonresident Alien Income Tax Return, meaning that virtually everyone who will be filing a federal tax return will be required to indicate whether they engaged in any transactions involving digital assets. Transactions include gifts, payments, sales, and donations of digital assets.

Digital Assets

What Is A Digital Asset?

A newer term to the financial world, a digital asset is anything of value that is represented digitally and is both identifiable and distributable. The most common types of digital financial assets include cryptocurrencies, stable coins, and non-fungible tokens. Any engagement with any digital assets must be reported to the IRS on income tax return forms.

How To Answer The Questions Regarding Digital Assets

Everyone who files Form 1040, Form 1040-SR or Form 1040-NR must answer the question of whether they engaged in a transaction involving digital assets in 2022 by checking either “yes” or “no.” Failure to answer honestly could result in criminal charges of tax fraud, audits, penalties, and other consequences.

Answering “Yes”

Taxpayers must check the “yes” box if they are engaged in any digital asset transactions. According to the IRS, this includes the following situations:

  • Receiving digital assets as payment for services or the sale of property
  • Transferring digital assets as a gift
  • Receiving digitals asset as a reward or award
  • Receiving digital assets from mining, staking, and similar online activities
  • Receiving digital assets that result from a hard fork
  • Use of digital assets as payment for services or property
  • Trading a digital asset for another digital asset
  • Selling a digital asset
  • Otherwise disposing of a financial interest in a digital asset

Reporting Digital Asset Income

Taxpayers should consult their tax professional and IRS publications to ensure compliance if they select “yes” as their answer to whether they’ve engaged in digital asset transactions in 2022. All digital asset income must be reported using the proper form, which may include Form 8949, Sales and other Dispositions of Capital Assets, Schedule D (Form 1040), Capital Gains and Losses, and/or Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, depending on the circumstances. Employees who were paid with digital assets must also report these assets as wages.

Answering “No”

Taxpayers who do not own digital assets, or who owned digital assets in 2022 but did not engage in any transactions during 2022, can check “no” on their federal income form. This includes:

  • Holding digital assets in an online account or wallet
  • Transferring digital assets from one wallet or account to another, if both are under the filer’s ownership or control
  • Purchasing digital assets with real currency

Additional information regarding the requirement to report income from digital assets can be found on the IRS’s Digital Assets page.

Obtain Guidance Regarding Cryptocurrency Taxation From Arizona’s Tax Attorneys

Do you have questions about cryptocurrencies and taxation? Schedule your confidential consultation with Silver Law, PLC, Arizona’s leading tax attorney firm. Our attorneys are committed to remaining up to date with taxation regulations and the ever-growing field of cryptocurrency so we can provide effective representation that protects your rights. Don’t try to face the IRS alone; let us provide the advice and guidance you need. Call our office today to get started.

 

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