All Sources of Income Must be Reported on Tax Return

On 3/6/24, the IRS released a reminder to all taxpayers that all sources of income must be reported on their tax return.  The IRS is paying close attention to all sources of income derived from digital asset transactions, the gig economy and service industry as well as income from foreign sources. IRS is keen on making sure that taxpayers file accurate tax returns and that taxpayers have all the appropriate guidance to report all sources of income

Sources of income from digital assets, including cryptocurrency, convertible virtual currency, stable coins, and Non-fungible Tokens

Everyone who files Forms 1040, 1040-SR, 1040-NR, 1041, 1065, 1120 and 1120-S must check one box answering either “Yes” or “No” to the digital asset question. The question must be answered by all taxpayers, not just by those who engaged in a transaction involving digital assets in 2023.

Checking “Yes”: Normally, a taxpayer must 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.

The IRS states in the reminder that in addition to: “checking the “Yes” box, taxpayers must report all income related to their digital asset transactions. For example, an investor who held a digital asset as a capital asset and sold, exchanged, or transferred it during 2023 must use Form 8949, Sales, and other Dispositions of Capital Assets, to figure their capital gain or loss on the transaction and then report it on Schedule D (Form 1040), Capital Gains and Losses. A taxpayer who disposed of any digital asset by gift may be required to file Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return. If an employee was paid with digital assets, they must report the value of the digital assets received as wages. Similarly, if they worked as an independent contractor and were paid with digital assets, they must report that income on Schedule C (Form 1040), Profit or Loss from Business (Sole Proprietorship). Schedule C is also used by anyone who sold, exchanged, or transferred digital assets to customers in connection with a trade or business and who did not operate the business through an entity other than a sole proprietorship.”

Checking “No” on the Box only if a taxpayer:

• Did not engage in any transactions involving digital assets during the year
• Held digital assets in a wallet or account
• Transferred digital assets from one wallet or account they own or control to another wallet or account they own or control
• Purchased digital assets using U.S. or other real currency, including through electronic platforms such as PayPal and Venmo

Sources of income from the Gig Economy

Examples of gig work include providing on-demand labor, services, goods, or selling goods online. Transactions often occur through digital platforms such as an app or website.

Taxpayers are required to report all income earned from the gig economy on a tax return, even if the income is:

• From temporary, part-time, or side work.
• Paid through digital assets like cryptocurrency, as well as cash, goods, or property.
• Not reported on an information return form like a Form 1099-K, 1099-MISC, W-2 or other income statement.

Service industry tips are also considered sources of income

Individuals who work in service industries such as restaurants, hotels and salons often receive tips from customers for their services. Tips like cash or non-cash payments are taxable and ought to be reported. Here is what you need to know about tips:

• All cash tips should be reported to the employer, who must include them on the employee’s Form W-2, Wage and Tax Statement. This includes direct cash tips from customer to employee, tips from one employee to another employee, electronically paid tips, and other tip-sharing arrangements.
• Noncash tips include value received in any medium other than cash, such as: passes, tickets, or other goods or commodities a customer gives the employee. Noncash tips aren’t reported to the employer but must be reported on a tax return.
• Any tips the employee didn’t report to the employer must be reported separately on Form 4137, Social Security and Medicare Tax on Unreported Tip Income, to include as additional income with their tax return. The employee must also pay the employee share of Social Security and Medicare tax owed on those tips.
• Service industry employees don’t have to report tip amounts of less than $20 per month per employer. For larger amounts, employees must report tips to the employer by the 10th of the month following the month the tips were received.

Foreign source income

A U.S. citizen or resident alien’s (those with a green card or who meet the substantial presence test) worldwide income is subject to U.S. income tax, regardless of their residence. “They’re also subject to the same income tax filing requirements that apply to U.S. citizens or resident aliens living in the United States. U.S. citizens and resident aliens must report unearned income, such as interest, dividends, and pensions, from sources outside the United States unless exempt by law or a tax treaty. They must also report earned income, such as wages and tips, from sources outside the United States”.

“An income tax filing requirement generally applies even if a taxpayer qualifies for tax benefits, such as the Foreign Earned Income Exclusion or the Foreign Tax Credit, which substantially reduce or eliminate U.S. tax liability. These tax benefits are available only if an eligible taxpayer files a U.S. income tax return.”

What are your sources of income?

Are you a U.S. taxpayer?

Do you have any foreign sources of income or any foreign accounts?

Who is your professional tax advisor? ©