”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, Forms 1041, U.S. Income Tax Return for Estates and Trusts; 1065, U.S. Return of Partnership Income; 1120, U.S. Corporation Income Tax Return; and 1120-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 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 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 on Schedule 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.”