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Navigating the 2023 tax season: Reporting digital asset income

Navigating the 2023 tax season: Reporting digital asset income

As the digital economy continues to expand, the Internal Revenue Service (IRS) has updated its guidelines for reporting income from digital assets. 

Understanding digital assets

Digital assets represent value recorded on a cryptographically secured, distributed ledger.

Key types of digital assets include:

  • Convertible virtual currencies and cryptocurrencies: Digital currencies that can be exchanged for real currencies or other digital currencies.
  • Stablecoins: Cryptocurrencies designed to minimize price volatility by being pegged to a currency or commodity.
  • Non-fungible tokens (NFTs): Unique digital assets that represent ownership of specific items or content, verified using blockchain technology.

Reporting requirements

The IRS mandates that all taxpayers using Forms 1040, 1040-SR, 1040-NR, 1041, 1065, 1120, and 1120S must address a specific question about digital asset transactions in the tax year.

This requirement underscores the IRS's commitment to ensuring compliance in the evolving landscape of digital currencies.

When to answer "yes"

Taxpayers should indicate "yes" to the digital asset question if they have:

  • Received digital assets as payment for goods or services
  • Earned digital assets through mining, staking, or similar activities
  • Sold or exchanged digital assets, including trading one digital asset for another
  • Disposed of a digital asset in any other manner, including gifts or transfers

How to report digital asset income

Reporting income from digital assets involves several steps, depending on the nature of the transaction:

  • Capital gains or losses: Use Form 8949 to report gains or losses from the sale or exchange of digital assets. These figures are then transferred to Schedule D (Form 1040) to calculate the overall capital gain or loss.
  • Wages and independent contractor income: If you received digital assets as payment for employment or independent contracting work, report the value of these assets as income on Schedule C (Form 1040).
  • Gifts of digital assets: Gifts of digital assets may require filing Form 709, the United States Gift (and Generation-Skipping Transfer) Tax Return.

When to answer "no"

Taxpayers who merely owned digital assets without engaging in any transactions can safely answer "no" to the digital asset question.

This also applies to those whose only activities were transferring digital assets between accounts they control or purchasing digital assets with real currency.

Bottom line

The IRS's emphasis on digital asset reporting reflects the growing significance of cryptocurrencies and other digital currencies in the global economy.

By staying informed and compliant with these guidelines, taxpayers can navigate the tax season with confidence, ensuring they meet their obligations while avoiding potential penalties.

For further details and assistance, taxpayers are encouraged to visit the IRS's official website or consult with a tax professional.

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Ines Zemelman, EA
Founder of TFX