The Internal Revenue Service (IRS) recently issued a reminder to all taxpayers regarding the reporting of digital assets and related income. This serves as a notice to taxpayers to ensure that they answer a specific question related to digital assets when filing their taxes.
The question in question asks taxpayers if they have received any digital assets as a reward, award, or payment for property or services, or if they have sold, exchanged, or disposed of a digital asset or a financial interest in a digital asset at any point during the 2023 tax year. The IRS defines digital assets as including convertible virtual currency and cryptocurrency, stablecoins, and non-fungible tokens (NFTs).
This update expands the number of forms that include the question, which was originally only found on three variants of the Form 1040 income tax return for individuals, seniors, and non-resident aliens. The question has now been added to four new income tax forms: Form 1041 for U.S. Income Tax Return for Estates and Trusts, Form 1065 for U.S. Return of Partnership Income, Form 1120 for U.S. Corporation Income Tax Return, and Form 1120-S for U.S. Income Tax Return for an S Corporation (a specific type of small business).
It is important to note that all taxpayers must respond to this question, regardless of whether or not they engaged in any digital asset transactions. They must answer “yes” or “no” accordingly. Those who received digital assets as payment, as a reward, from mining and staking, from a hard fork, or if they disposed of or sold digital assets in various ways, must answer “yes” and report the income from these transactions. On the other hand, those who did not engage in digital asset transactions, but only held digital assets, transferred them between wallets or accounts, or purchased them with U.S. dollars or other real currency, may answer “no.”
It is critical for investors to understand that they must answer “yes” if they traded one digital asset for another, but they may answer “no” if they purchased digital assets with USD or cash. This question is not related to the controversial tax rule that requires businesses to report transactions above $10,000 within 15 days, as this rule currently only applies to cash and not digital assets.
In conclusion, it is important for all taxpayers to take note of this reminder from the IRS and ensure that they answer the digital asset question accurately. Failure to do so may result in penalties or fines.