Taxpayers are required to report all digital assets on their federal income tax returns. Optima Tax Relief reminds taxpayers of digital assets and how to write them during tax time.
What are digital assets?
A digital asset is generally anything that is created digitally and has value. It is typically stored on a cryptographically secured ledger. The most common digital assets include cryptocurrency, convertible virtual currency, stablecoins, and non-fungible tokens (NFTs).
Digital assets and federal income tax returns
In previous years, digital assets were referred to as virtual currencies, so taxpayers should know these terms are the same. For the tax year 2022, Forms 1040, 1040-SR, and 1040-NR will ask the question, “At any time during 2022, did you: (a) receive (as a reward, award or payment Receive (as payment for property or services) or participate in any transaction involving the sale, exchange, gifting, or disposal of a digital asset (or a financial interest in a digital asset)?”
When to answer “Yes” to the digital assets question
A taxpayer should respond “Yes” to this question on their tax return if any of the following is true:
- They received digital assets as payments for property or service
- They gave away digital assets as a gift without any transfer fees
- They received digital assets as a reward or award
- They received new digital assets from mining, staking, or other similar activities
- They received digital assets from a hard fork
- They disposed of digital assets in exchange for property or services
- They disposed of digital assets in exchange for another digital asset
- They sold a digital asset
- They disposed of any other financial interest in a digital asset.
Reporting income from digital asset transactions
If any of the above is true, taxpayers should report all income related to their digital asset transactions as necessary. For example, if digital assets were received in exchange for work, they must notify the value of the assets as wages. If a taxpayer-owned digital asset did not engage in any transactions of digital assets, they should be able to answer the question with “No.”
The same is true for those who transferred their digital assets from one account to another account they own and those who purchased digital assets using real currency through electronic platforms, such as Venmo or PayPal.