Everyone who files a Form 1040, 1040-SR or 1040-NR will have to check one box, answering either yes or no to the digital asset question: “At any time during 2022, did you:
- receive (as a reward, award or payment for property or services); or
- sell, exchange, gift or otherwise dispose of a digital asset (or a financial interest in a digital asset)?”
The IRS decided to change the verbiage “virtual currency” to “digital asset” this year so it would include more than just cryptocurrencies like Bitcoin, but also non-fungible tokens and stablecoins (tokens backed by fixed assets, like gold). The IRS has also revised the instructions for answering the question and clarified them to help taxpayers answer it correctly.
All taxpayers need to answer the question, whether or not they engaged in any transactions involving digital assets. The IRS says the digital assets can include convertible virtual currency and cryptocurrency, as well as stablecoins and NFTs. Taxpayers will need to 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.
SALES AND GIFTS: Along with checking the yes box, taxpayers will need to report all the income related to their digital asset transactions, so other forms may be involved as well. The IRS cites the example of an investor who held a digital asset as a capital asset and sold, exchanged or transferred it during 2022. The investor would need to use Form 8949, Sales and other Dispositions of Capital Assets, to calculate 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 case it’s a gift.
WAGES OR INCOME: If an employee was paid in the form of digital assets, as some employers have done, they have to report the value of assets received as wages. Similarly, if they worked as an independent contractor and were paid with digital assets, they need to report that income on Schedule C (Form 1040), Profit or Loss from Business (Sole Proprietorship). Schedule C would also be used by anybody who sold, exchanged or transferred digital assets to customers in a trade or business.
WHO CAN CHECK “NO:” On the other hand, not every crypto owner needs to check the yes box. If a taxpayer merely owned digital assets last year, but didn’t sell or buy any, they can check the no box as long as they didn’t 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.
DONATIONS: Clarification of the rules surrounding donations of cryptocurrency came in a recent memorandum that “….any claims for charitable deductions over $5,000 need to have a “qualified appraisal” to support them.”
Reach out to us! A slight change in wording at the top of Form 1040 added by the IRS will serve as a declaration whether taxpayers bought or sold cryptocurrency last year. Remember crypto is treated like an asset in the eyes of the IRS. Let our tax experts and financial advisors help you be sure your transactions are tax efficient and being reported properly. Got questions? We have answers! Call toll free: 855-542-7537 or email CPA@Fuoco.com.
