As the digital age advances, the intersection of technology and tax obligations becomes increasingly complex, particularly when it comes to digital assets like cryptocurrencies. The Internal Revenue Service (IRS) of the United States has emphasized the importance of accurately reporting all digital asset transactions on federal income tax returns. This stipulation is particularly relevant as taxpayers prepare their 2023 filings.
Digital assets, according to the IRS, include any digital representation of value that is recorded on a cryptographically secured, decentralized ledger, or similar technology. This broad category encompasses cryptocurrencies such as Bitcoin and Ethereum, stablecoins, and non-fungible tokens (NFTs). For taxation purposes, these assets are considered property, and general property tax principles apply to transactions involving them.
In 2023, a significant update was made to the tax forms, including Form 1040 for individuals, Form 1040-SR for seniors, and Form 1040-NR for nonresident aliens, incorporating a question about digital assets at the top of these forms. This question also appears on Form 1041 for estates and trusts, Form 1065 for partnerships, as well as Forms 1120 and 1120-S for corporations and S corporations, respectively.
Taxpayers must answer whether at any time during 2023, they received digital assets as payment for goods or services or as rewards; sold, exchanged, or otherwise disposed of digital assets; or had any other transactions involving their economic interests in digital assets.
Answering ‘yes’ on this question is necessary if the taxpayer received digital assets as compensation or in exchange for services or goods; acquired digital assets through mining, staking, or similar activities; benefited from hard forks; or engaged in the sale or exchange of digital assets for other properties, including other digital assets.
Additionally, any income derived from these transactions must be reported. For example, taxpayers who held digital assets as capital assets and sold or exchanged them during the year would need to fill out Form 8949 to calculate capital gains or losses, reporting these figures on Schedule D (Form 1040). Individuals disposing of digital assets through gifts might need to file Form 709, the United States Gift (and Generation-Skipping Transfer) Tax Return.
It is crucial for employees receiving digital assets as part of their remuneration to report the value of the assets as income. Similarly, independent contractors receiving digital assets for their services must report this on Schedule C (Form 1040), which also applies to individuals engaging in business or trade involving digital assets.
Failure to accurately report income can lead to accrued interests and penalties, encompassing various sources of income like interest, unemployment benefits, and revenue from services, gig work, or digital assets.
For taxpayers who merely owned digital assets without engaging in any transactions during the year, the answer to the digital asset question would be ‘no’. This also applies to those who merely moved assets between wallets or accounts they control, or those who purchased digital assets with traditional currencies.
For further guidance and details on frequently asked questions, the IRS provides resources on its website at IRS.gov.
