In a media release headlined "Updates to question on digital assets; taxpayers should continue to report all digital asset income" the IRS cautions (it says "reminds" but that turns out to be misleading) taxpayers that they "must again answer a digital asset question and report all digital asset-related income when they file their 2022 federal income tax return, as they did for fiscal year 2021."
But it's not the same question; indeed, there is a fundamentally different aspect to it.
The press release says "The term “digital assets” has replaced “virtual currencies,” a term used in previous years."
So, not a reminder, then.
The press release is again misleading when it says that the question on 1040, Individual Income Tax Return [ http://www.irs.gov/Form1040 ]; 1040-SR, U.S. Tax Return for Seniors [ https://www.irs.gov/forms-pubs/about-form-1040-sr ]; and 1040-NR, U.S. Non-Resident Alien Income Tax Return [ https://www.irs.gov/forms-pubs/about-form-1040-nr ], "was revised this year to update terminology."
No. It's a fundamental change from a single asset class to a class that includes multiple types of asset.
There's a significant change in the nature of the question: now instead of declaring digital assets, there is an obligation on taxpayers to declare whether they engaged in any transactions involving digital assets.
The media release includes this: "For the 2022 tax year it 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)?""
Digital assets are defined as
*Convertible virtual currency and cryptocurrency
* Non-fungible tokens (NFTs)
Then there is an admirably clear statement in bold: "*Everyone must answer the question*"
And there is an explanation of relevant transactions:
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.
Besides 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 2022 must use Form 8949, Sales and other Dispositions of Capital Assets [ http://www.irs.gov/form8949 ], to figure their capital gain or loss on the transaction and then report it on Schedule D (Form 1040), Capital Gains and Losses [ http://www.irs.gov/scheduled ], or Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return [ https://www.irs.gov/forms-pubs/about-form-709 ], in the case of gift.
If an employee was paid with digital assets, they must report the value of 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) [ http://www.irs.gov/schedulec ]. Schedule C is also used by anyone who sold, exchanged or transferred digital assets to customers in connection with a trade or business.
The question relates to "transactions" not "holdings. So:
"Normally, a taxpayer who merely owned digital assets during 2022 can tick the "No" box so long as they did not engage in any transactions involving digital assets during the year. They can also tick the "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; or
* Purchasing digital assets using U.S. or other real currency, including through electronic platforms such as PayPal and Venmo. "
Why is the last point there? It's because those platforms are required to report fiat-crypto transactions.
Venmo, a subsidiary of PayPal, says "The Internal Revenue Service (IRS) requires all payment processors in the United States, including Venmo, to provide information about customers who receive payments for the sale of goods or services. "
But in December 2022 the IRS changed the implementation date to December 2023. So that appears to mean that taxpayers can say "no" on the form but the IRS won't hear from relevant platforms for the whole of 2023.
Clarification from a tax expert would be wise.