The IRS Gets More Real About Their Interest In Virtual Currencies

Some call it cryptocurrency. Others call it virtual currency. Some refer to digital assets. The IRS now lumps each of those things and more, including non-fungible tokens (NFTs) into the singular phrase of “digital assets.” And the IRS has a real, and continuously growing interest in getting their cut of the value of all “digital assets.”

On the 2022 tax return form, the IRS asks a question that all taxpayers must answer. The question has been revised and clarified from the previous tax season to update terminology and leave no room for doubt or error. Here it is: “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)? A digital asset is defined by the IRS as a digital representation of value that is recorded on a cryptographically secured, distributed ledger. Common digital assets include convertible virtual currency and cryptocurrency, stablecoins, and nonfungible tokens (NFTs).”

To Say Yay Or Nay, That Is The Question

So, how do you know if you should answer “yes” or “no” to the IRS question regarding digital assets? According to the IRS, taxpayers must check “yes” 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.

If you owned digital assets during 2022 you may check the “no” box as long you did not engage in any transactions involving digital assets during the year. Taxpayers can also check 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
  • Purchasing digital assets using U.S. or other real currency, including through electronic platforms such as PayPal and Venmo

Your Digital Assets Are No Less Real To The IRS Than Real Estate

The IRS has been working for quite some time to figure out how to tax digital assets which were created essentially to avoid being traced, tracked, or taxed. And they have finally accomplished what they set out to do. So, if you have any dealings with digital currency of any kind, don’t try to fool the IRS into thinking you don’t. Because even though you can’t touch them or feel them or sometimes even see them, those digital assets are as real to the IRS as the roof over your head.

Tax Year 2022 1040 (and 1040-SR) Instructions. 


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