”At any time during 2023, did you: (a) receive (as a reward, award or payment for property or services); or (b) sell, exchange, or otherwise dispose of a digital asset (or a financial interest in a digital asset)?”
The above question, or some version of it, now appears on the 2023 versions of many different tax returns, including the Form 1040 series, Forms1041, U.S. Income Tax Return for Estates and Trusts;1065, U.S. Return of Partnership Income;1120, U.S. Corporation Income Tax Return; and1120-S, U.S. Income Tax Return for an S Corporation.
Everyone who files these forms 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.
Additionally, the IRS has hired two experts to assist with digital asset compliance. The two “executive advisers” have extensive experience in the tax and crypto industries and will help lead IRS efforts on digital assets (more information below).
When to Check “Yes”
According to recent guidance by the IRS, a taxpayer must check the “Yes” box if they:
- Received digital assets as payment for property or services provided
- 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 (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
- Otherwise disposed of any other financial interest in a digital asset
When to Check “No”
If a taxpayer only owned digital assets during the year, they can check the “No” box as long as they did not engage in any digital asset transactions. They also can check the “No” box if their actions were limited to one of these activities:
- Holding digital assets in a wallet or account
- Transferring digital assets from one of their wallets or accounts to another wallet or account they own or control
- Purchasing digital assets using U.S. or other real currency, including through electronic platforms
Digital Assets Covered
The IRS defines “digital asset” as a digital representation of value that is recorded on a cryptographically secured, distributed ledger or any similar technology. Common digital assets include:
- Convertible virtual currency and cryptocurrency
- Stablecoins
- Non-fungible tokens (NFTs)
Reporting Digital Asset Income
Taxpayers must reportall incomerelated 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 report their capital gain or loss on the transaction and file the appropriate Schedules. A taxpayer who disposed of any digital asset by gift may need to file a gift tax return.
If an employee is paid with digital assets, they must report the value of assets received as wages on their Form 1040. If they worked as an independent contractor and were paid with digital assets, they must report that income onSchedule C (Form 1040), Profit or Loss from Business (Sole Proprietorship). Taxpayers must also use Schedule C if they sold, exchanged or transferred digital assets to customers in connection with a trade or business.
IRS Hires Digital Assets Experts
The IRS has added two industry experts to help the agency’s efforts in the cryptocurrency and other digital assets arena. Sulolit “Raj” Mukherjee, JD, and Seth Wilks, CPA, have been hired as executive advisors in the IRS Office of Digital Asset Initiative and will help lead IRS efforts to build service, reporting, compliance and enforcement programs focused on digital assets.
Mukherjee joins the IRS from a private blockchain software technology company, Consynses, where he served as Global Head of Tax. Wilks, formerly with TaxBit, has worked on digital asset tax policy for six years focusing on issues related to multinational corporations and manufacturing, with a focus on complex supply chains, transfer pricing and cross-border transactions.
“Seth and Raj expand our ability to understand this sector while designing systems for reporting of cryptocurrency and digital assets and related transactions,” said Doug O’Donnell, IRS Deputy Commissioner, Services and Enforcement. He added that the “rapidly evolving global landscape” of digital assets “…is a top IRS priority.”
FAQs
According to recent guidance by the IRS, a taxpayer must check the “Yes” box if they: Received digital assets as payment for property or services provided. Received digital assets resulting from a reward or award. Received new digital assets resulting from mining, staking and similar activities.
Why is the IRS asking about digital assets? ›
You may have to report transactions with digital assets such as cryptocurrency and non fungible tokens (NFTs) on your tax return. Income from digital assets is taxable.
What is the new IRS question that must be answered? ›
Everyone who files Forms 1040, 1040-SR, 1040-NR, 1041, 1065, 1120, 1120 and 1120S 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.
What is the question on Turbotax digital assets? ›
The IRS will ask you if you received, exchanged or sold any digital assets during the year. If so, it is up to you to report income associated with that on your tax return.
What is a digital asset in EverFi? ›
Key Characteristics of Digital Assets
Divisible: Some digital assets can be divided into smaller units for easier transactions (e.g., cryptocurrencies). Stored Digitally: Digital assets are securely stored in digital wallets or on distributed ledger technologies.
What is the digital asset question on a tax return? ›
”At any time during 2023, did you: (a) receive (as a reward, award or payment for property or services); or (b) sell, exchange, or otherwise dispose of a digital asset (or a financial interest in a digital asset)?”
Which of the following situations allows you to answer no to the digital asset question? ›
A “No” answer is correct if during the taxable year the taxpayer merely holds digital assets, transfers digital assets between accounts owned by the taxpayer, or purchases digital assets with U.S. or other real currency.
Did you have a financial stake in a digital asset? ›
The IRS has said that 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.
Is Venmo a virtual currency? ›
Venmo is licensed to engage in virtual currency business activity by the New York State Department of Financial Services.
Who controls digital assets? ›
A digital asset that's a security is referred to as a “digital asset security.” As such, it's regulated by the SEC. This is a type of currency that represents a fiat, or government-backed currency, on the blockchain. For example, digital fiat in the U.S. would be pegged to the U.S. dollar.
As per Section 115BBH(1), the income arising from the transfer of virtual digital assets shall be taxed at the rate of 30%. Thus, short-term and long-term capital gains both shall be taxed at a flat rate of 30%.
What are digital assets on a balance sheet? ›
The Internal Revenue Service considers any digital representation of value recorded on a blockchain a digital asset. This includes cryptocurrency, stablecoins, non-fungible tokens, and convertible virtual currencies.
Is a bank account a digital asset? ›
No, a bank account is not considered a digital asset by the IRS because it represents stored fiat currency. According to the IRS, digital assets must be 'recorded on a cryptographically secured digital ledger'.
Is a laptop a digital asset? ›
Digital assets are often in the form of computers, external hard drives or flash drives, laptops, tablets, smartphones, digital music players, e-readers, digital cameras, and similar devices.
What are the three main categories of digital assets? ›
What Types of Digital Assets Exist?
- Digital store of value assets.
- Decentralized internet or “Web3” assets.
- Digitized payment assets.
The more crypto goes up the more the IRS wants to know everything about your crypto trading because the more you make the more they make. As the laws around specific crypto trades develop the more complicated the tax process becomes for you.
Why do we need digital assets? ›
Digital asset management systems empower businesses to harness customer data and insights effectively for better decision-making. By leveraging DAM's analytics capabilities, companies can gain valuable information about customer preferences, behaviors, and engagement patterns.
What are virtual digital assets as per Income Tax Act? ›
VDA has been defined in a wide manner to, inter-alia, include any information, code, number or token not being Indian or foreign currency, and generated through cryptographic means or others. No deduction with respect to any expenditure or allowance (other than the cost of acquisition) will be available.
Do you have to report crypto under $600? ›
You must report income, gain, or loss from all taxable transactions involving virtual currency on your Federal income tax return for the taxable year of the transaction, regardless of the amount or whether you receive a payee statement or information return.
