Taxpayers Must Report Digital Asset Incomes When Filing Returns: IRS

All taxpayers filing returns must confirm or deny whether they conducted a digital transaction.

The Internal Revenue Service (IRS) building in Washington on Jan. 4, 2024. Madalina Vasiliu/The Epoch Times

The Internal Revenue Service (IRS) reminded taxpayers to report all cryptocurrency and digital asset incomes they made last year when filing returns during the upcoming filing season that begins next week.

A question regarding digital asset transactions appears on top of relevant tax forms and has been updated this year, the agency said in a Jan. 22 press release.

It asks—“At any time during 2023, did you: (a) receive (as a reward, award or payment for property or services); or (b) sell, exchange, or otherwise dispose of a digital asset (or a financial interest in a digital asset)?”

All taxpayers filing forms 1040, 1040-SR, 1040-NR, 1041, 1065, 1120, 1120 and 1120S must answer the question regardless of whether they conducted digital asset transactions or not. The following instances necessitate checking the “yes” option:

• Received digital assets as payment for property or services provided.
• 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.
• Otherwise disposed of any other financial interest in a digital asset.

A taxpayer who owns digital assets but did not engage in any transactions involving these assets during the tax year can select the “no” option. Taxpayers can select “no” if their activities only involve any 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.
• Purchasing digital assets using U.S. dollar or other real currency, including through electronic platforms.

Taxpayers who check “yes” should report all income related to digital asset transactions. Those who sold, exchanged, or transferred a digital asset should use Form 8949, Sales and other Dispositions of Capital Assets, to determine their total capital gain or loss and then report it through Schedule D (Form 1040), Capital Gains and Losses.

An individual who disposed of a digital asset as a gift may have to file Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return. Employees who received digital assets as remuneration should report it as wages.

The tax filing season will begin on Jan. 29. The agency is expecting over 128.7 million individual tax returns to be filed by the deadline of April 15.

Business Transactions

Independent contractors who were paid in digital assets must report the income through Schedule C (Form 1040), Profit or Loss from Business (Sole Proprietorship). This form is also used by businesses engaged in the sale, exchange, or transfer of digital assets to customers due to a trade or business.

On Jan. 16, the IRS and the Treasury Department announced that businesses do not have to report certain digital asset transactions the same way as they report the receipt of cash unless the agencies issue relevant regulations.

IRS section 6050I(a) requires any business that receives cash exceeding $10,000 in a single transaction or two or more related transactions to file an information return via Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business.

The filing must be done within 15 days of the receipt of the cash.

The Infrastructure Investment and Jobs Act signed into law by President Biden in 2021 modified the definition of cash to include digital assets. As such, businesses receiving over $10,000 partially in digital assets and partly in cash or fully in digital assets would be obliged also to report it within 15 days of receipt.

However, the rules only can come into effect once the IRS and Treasury issue regulations for it. As this has not been done, such digital asset transactions need not be reported by businesses for now.

The IRS and Treasury are also strengthening their oversight of digital asset transactions at the broker level, proposing new regulations. In August, the Treasury said regulations “would require brokers of digital assets to report certain sales and exchanges.”

The move is “part of a broader effort at Treasury to close the tax gap, address the tax evasion risks posed by digital assets, and help ensure that everyone plays by the same set of rules.”

The new rules will also help taxpayers in filing their returns, the Treasury stated.

Under current laws, citizens owe tax on gains made on the sale or exchange of digital assets and can deduct losses on such activity. However, “for many taxpayers, it is difficult and costly to calculate their gains.”

The proposal would require that digital asset brokers “provide a new Form 1099-DA to help taxpayers determine if they owe taxes, and would help taxpayers avoid having to make complicated calculations or pay digital asset tax preparation services in order to file their tax returns.”