In an early release (10/17/18) of Draft IRS Tax Forms 1040 and 1040-SR Instructions, the IRS has provided U.S. Taxpayers digital assets holders a bit more clarity about how to report digital assets on their 1040 income tax forms. On 9/1/22, the IRS posted Form 1040 2022 Draft. Form 1040 is the U.S. Individual Income Tax Return and since tax year 2019, Form 1040 has been asking taxpayers about their virtual currency doings on the front page. Form 1040 2022 Draft changes the crypto terminology from “virtual currency” to “digital assets”. The purpose of the change in terminology could be interpreted as a “head up” to taxpayers that the IRS is looking more closely as well as an intention to provide more clarity. That said, taxpayers ought to treat the expanded terminology or rewording that the IRS wants to know all about a taxpayer’s crypto dealings and if a taxpayer is uninformed – he or she will be an easy IRS audit target. Of note, the Draft 2022 Instructions instruct all taxpayers to answer the digital asset question on Forms 1040 and 1040-SR as follows: “Do not leave this field blank. The question must be answered by all taxpayers, not just taxpayers who engaged in a transaction involving digital assets”.
FORM 1040 2021
At any time during 2021, did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency? Yes or No
FORM 1040 2022 DRAFT
Digital Assets: 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)? (See instructions.) Yes or No
- Are any digital representations of value that are recorded on a cryptographically secured distributed ledger or any similar technology.
- Include non-fungible tokens (NFTs) and virtual currencies, such as cryptocurrencies and stablecoins.
- If a particular asset has the characteristics of a digital asset, it will be treated as a digital asset for federal income tax purposes.
Here is what you need to know about Forms 1040 and 1040-SR Instructions
Check the “Yes” box next to the question on digital assets on page 1 of Form 1040 or 1040-SR if at any time during 2022, if you: received (as a reward, award, or payment for property or services); or (b) sold, exchanged, gifted, or otherwise disposed of a digital asset (or any financial interest in any digital asset).
Examples provided for “checking Yes” if at any time during 2022 are:
- Received digital assets as payment for property or services provided
- Received digital assets as a result of a reward or award
- Received new digital assets as a result of mining, staking, and similar activities
- Received digital assets as a result of a hard fork
- 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
- Transferred digital assets for free (without receiving any consideration) as a bona fide gift
- Disposed of any other financial interest in a digital asset
When do you have a financial interest in a digital asset?
You have a financial interest in a digital asset if you are the owner of record of a digital asset, or have an ownership stake in an account that holds one or more digital assets, including the rights and obligations to acquire a financial interest, or you own a wallet that holds digital assets.
Examples provided for “checking NO” if at any time during 2022 are:
- Holding a digital asset in a wallet or account
- Transferring a digital asset from one wallet or account you own or control to another wallet or account that you own or control
- Purchasing digital assets using U.S. or other real currency, including through the use of electronic platforms such as PayPal and Venmo. Do not leave the question unanswered. You must answer “Yes” or “No” by checking the appropriate box.
How to Report Digital Assets Transactions
As per the IRS instructions, if you disposed of any digital asset in 2022, that you held as a capital asset, through a sale, exchange, gift, or transfer, check “Yes” and use Form 8949 to calculate your capital gain or loss and report that gain or loss on Schedule D (Form 1040). If you received any digital asset as compensation for services or disposed of any digital asset that you held for sale to customers in a trade or business, you must report the income as you would report other income of the same type (for example, W-2 wages on Form 1040 or 1040-SR, line 1a, or inventory or services from Schedule C or Schedule 1).
Best to consult your Crypto Tax Advisor when filing 2022 Taxes ©