Reporting Digital Assets To The IRS
Owning digital assets has become more common in recent years, with the rise of cryptocurrencies and non-fungible tokens (NFTs). Like any other source of income, digital asset earnings must be reported to the IRS. For help reporting your own income, or to speak with a member of our legal team about another tax-related question, please call our office today.
What are Digital Assets?
Digital assets are not real currency because they don’t take the form of paper money or a coin and aren’t digitally issued by a government’s central bank. Rather, they are digital representations with a value that is equivalent to real currency. Cryptocurrency, for instance, isa type of digital asset that can be used as a payment method for goods and services, digitally traded, and exchanged for real currencies. Other common digital assets include:
- Non-fungible tokens (NFTs), which are unique cryptographic tokens on a blockchain that can’t be replicated and represent digital and real items, such as artwork;
- Asset-backed tokens, which are a type of cryptocurrency whose value is attached to another type of asset, like gold, in order to stabilize its price; and
- Tokenized real estate, which involves the fractionalizing of real property into tokens that are then stored on a database.
Because they can be used as a form of payment, digital assets must often be reported to the IRS, like any other type of income.
Digital Asset-Related Questions
When taxpayers file this year’s federal income tax returns, they will be required to indicate whether, during 2022, they received a digital asset as a reward, award, or payment for services or property, or sold, exchanged, gifted, or disposed of a digital asset, or a financial interest in a digital asset. Taxpayers should answer this question in the affirmative if, at any time in 2022, they:
- Received or disposed of a digital asset as payment;
- Transferred a digital asset for free;
- Received a digital asset as a reward;
- Received digital assets from staking, mining, or a similar activity;
- Received cryptocurrency from a blockchain that divided a single cryptocurrency into two;
- Sold a digital asset; or
- Exchanged or traded one digital asset for another.
A taxpayer who only owned digital assets, however, can check “No” on this question, as long as he or she didn’t engage in any transactions with those assets. Holding a digital asset in an account, transferring such an asset from one account to another, or purchasing a digital asset using real currency don’t qualify as transactions for this purpose.
Reporting Digital Asset Income
Besides truthfully answering this question, taxpayers must also report any income related to a digital asset transaction. An investor who held a digital asset as a capital asset, for instance, but sold it in 2022, will need to calculate his or her capital gain or loss on Form 8949 and then report it on Form 1040. An employee or independent contractor who was paid with digital assets, on the other hand, must report the value of any assets received as wages.
Set Up a One-on-One Meeting Today
Do you need help reporting your digital asset to the IRS? Don’t hesitate to call CPA, former FBI Special Agent, and experienced tax return preparation lawyer Ronald Cutler, P.A. at 386-490-9949 for help.