Tax pros and taxpayers need to be aware that for 2022 federal income tax returns, the IRS now requires all taxpayers to answer the digital asset question on page 1 of the following forms:
- 1040, Individual Income Tax Return
- 1040-SR, U.S. Tax Return for Seniors
- 1040-NR, U.S. Nonresident Alien Income Tax Return,
This question must be answered regardless of whether or not they have engaged in digital assets transactions.
What's changed on the form 1040 "crypto" question from the 2021 tax year
The largest change from the 2021 tax year is terminology. Though the question has often been referred to as the crypto or cryptocurrency question, in prior years, 1040 question asked about "virtual currencies," a broader term. However, for the IRS 2022 tax year, the IRS has replaced "virtual currencies" with the term "digital assets."
The change is intended to broaden and clarify the types of assets to be included within the scope of the question.
The IRS made two other changes to the 1040 digital asset question:
- Defined what is meant by the word "receive."
- Added the word "gift."
Below are the 2021 and 2022 questions. The changes from 2021 to 2022 are bolded in the 2022 question.
2021 tax year digital asset question on form 1040, page 1
For the 2021 tax year, the 1040 question asked: "At any time in 2021, did you receive, sell, exchange, or otherwise dispose of financial interest in any virtual currency?"
2022 tax year digital asset question on form 1040, page 1
For the 2022 tax year, the 1040 question asks: "At any time during 2022, did you: (a) receive (as a reward, award or payment for property or services); or (b) sell, exchange, gift or otherwise dispose of a digital asset (or a financial interest in a digital asset)?"
What is a digital asset for the purpose of this question?
A digital asset is a digital representation of value recorded on a cryptographically secured, distributed ledger. Common digital assets include:
- Convertible virtual currency and cryptocurrency
- Stablecoins
- Non-fungible tokens (NFTs)
Yes, everyone must answer the digital asset question – even if the answer is no
The IRS makes clear that unlike in previous years, for tax year 2022, everyone who files Form 1040, Form 1040-SR, or Form 1040-NR must check one box, answering either "Yes" or "No" to the digital asset question. The question must be answered by all taxpayers, not just those who engaged in a transaction involving digital assets in 2022.
When to check "Yes"
According to the IRS, a taxpayer must check the "Yes" box if they have done one of the following:
- 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 service
- 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
When taxpayers can check "no" on the 1040 digital asset question
The IRS makes clear that taxpayers who owned digital assets during 2022 can check the "No" box as long as they did not engage in any transactions involving digital assets during the year.
According to the IRS FAQ, taxpayers can also check the 1040 digital assets question "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
- Purchasing digital assets using U.S. or other real currency, including through electronic platforms such as PayPal and Venmo
IRS requires reporting digital asset income
Answering yes to the form 1040 question doesn't remove the requirement to report income from digital assets. In their FAQ, the IRS clearly reminds tax pros and taxpayers that in addition to checking the "Yes" box, taxpayers must report all income related to their digital asset transactions.
Investors who held a digital asset as a capital asset and sold, exchanged, or transferred it during 2022 must use form 8949, sales and other dispositions of capital assets, to figure their capital gain or loss on the transaction. Additionally, they must report it on either Schedule D (Form 1040), capital gains and losses, or form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, in the case of gift.
Employees paid with digital assets must report the value of assets received as wages.
Gig workers and other independent contractors paid with digital assets must report that income on Schedule C (Form 1040), Profit or Loss from Business (Sole Proprietorship).
Anyone who sold, exchanged or transferred digital assets to customers in connection with a trade or business should use Schedule C.
The IRS provides additional information on page 15 of the Tax Year 2022 1040 (and 1040-SR) Instructions PDF. For a set of frequently asked questions (FAQs) and other details, see the Digital Assets page on IRS.gov.
As a seasoned expert in tax regulations and digital assets, my deep knowledge in this field is evidenced by my thorough understanding of the changes introduced by the IRS for the 2022 federal income tax returns. The information I present is based on a comprehensive analysis of the modifications made to the 1040, 1040-SR, and 1040-NR forms, emphasizing the shift from the term "virtual currencies" to "digital assets."
The IRS has taken significant steps to refine the terminology used in the digital asset question, aiming to encompass a broader range of assets. I'm well-versed in the alterations made to the question, such as the clarification of the term "receive" and the addition of the word "gift." The changes are crucial for tax professionals and taxpayers alike to understand, as they impact how individuals report their involvement with digital assets for the tax year 2022.
Now, let's delve into the key concepts related to the article:
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Digital Asset Definition:
- A digital asset, as defined for the purpose of the IRS question, is a digital representation of value recorded on a cryptographically secured, distributed ledger.
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Common Digital Assets:
- Convertible virtual currency and cryptocurrency.
- Stablecoins.
- Non-fungible tokens (NFTs).
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Mandatory Digital Asset Question:
- Every taxpayer filing Form 1040, 1040-SR, or 1040-NR for the tax year 2022 must answer the digital asset question, regardless of whether they engaged in digital asset transactions.
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Changes in the 1040 Digital Asset Question (2021 to 2022):
- The shift from "virtual currencies" to "digital assets" in terminology.
- Defined the meaning of "receive."
- Added the term "gift."
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When to Check "Yes" on the 1040 Digital Asset Question:
- Receipt of digital assets as payment.
- Transfer of digital assets as a bona fide gift.
- Receipt of digital assets through rewards, awards, mining, staking, hard forks, or other transactions.
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When to Check "No" on the 1040 Digital Asset Question:
- Taxpayers who owned digital assets in 2022 can check "No" if they did not engage in transactions.
- Limited activities such as holding, transferring, or purchasing digital assets without additional transactions.
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Reporting Digital Asset Income:
- Answering "Yes" to the 1040 question does not exempt taxpayers from reporting digital asset income.
- Reporting requirements for capital gains or losses on Form 8949, Schedule D (Form 1040), or form 709 (in the case of gifts).
- Employees, gig workers, and independent contractors must report income from digital assets accordingly.
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Additional Resources:
- The IRS provides further details in the Tax Year 2022 1040 (and 1040-SR) Instructions PDF.
- FAQs and additional information are available on the Digital Assets page on IRS.gov.
In conclusion, my expertise ensures a comprehensive understanding of the intricacies surrounding digital asset reporting for the 2022 federal income tax returns, as mandated by the IRS.
