Digital assets have evolved to become a mainstream part of our country’s financial system. Specifically, the utilization of cryptocurrency has surged in recent years. Therefore, understanding the guidelines for digital asset taxation is crucial for all U.S. taxpayers.
For U.S. citizens’ 2022 federal income tax returns, the question pertaining to digital assets has been updated. Everyone who files a return must answer the question. However, knowing whether to check “yes” or “no” may be complicated.
If you have encountered an issue regarding digital asset reporting, seek help from our experienced Dual Licensed Tax Attorneys and CPAs at the Tax Law Offices of David W. Klasing. Call us today at (800) 681-1295.
Updated Question on Digital Assets for U.S. Taxpayers
All U.S. taxpayers must answer the question on digital assets. For the 2022 filing season, it has been updated to read as follows:
“At any time during 2022, did you: (a) receive (as reward, award, or payment for property or services); or (b) sell, exchange, gift, or otherwise dispose of a digital asset (or financial interest in a digital asset)?”
Tax laws surrounding digital assets are frequently evolving. It can be difficult to understand your obligations. Fortunately, our Dual Licensed Tax Attorneys and CPAs can help resolve any issues pertaining to digital asset reporting.
What Constitutes a Digital Asset?
Digital assets can be broadly described as any digital representations of value that are recorded on a cryptographically secured distributed ledger or similar form of technology. These types of assets include the following:
- Cryptocurrency and convertible virtual currency
- Stablecoins
- Non-fungible tokens (NFTs)
Other forms of digital assets exist as well.
When Should You Answer “Yes” to the Updated Digital Asset Question on Your U.S. Tax Return?
There are several different factors to analyze when determining whether or not to answer “yes” to the updated digital asset question on your tax return. Normally, you should reply “yes” if you took any of the following actions:
- Accepted digital assets as payment for real property or services provided
- Received digital assets stemming from an award or reward
- Transferred digital assets as a free gift (meaning you did not receive any consideration for the transfer)
- Acquired digital assets stemming from staking, mining, and similar activities
- Acquired digital assets stemming from a “hard ford” (a branching of a cryptocurrency’s blockchain that splits a single cryptocurrency into two)
- Disposed of digital assets in exchange for services or real property
- Disposed of digital assets in exchange for other digital assets
- Sold one or more of your digital assets
- Otherwise disposed of a financial interest in a digital asset
Accordingly, there are many reasons that U.S. taxpayers may have to answer “yes” to the updated question. If you are encountering problems regarding your digital asset reporting, you may consult with our experienced tax attorneys for help determining the proper course of action.
When Should You Answer “No” to the Updated Digital Asset Question on Your U.S. Tax Return?
Suppose you merely owned digital assets in 2022, as opposed to engaging in transactions involving digital assets. In that case, you may be able to answer “no” to the updated question on your tax return. Generally, you may select no if your activities were limited to the following:
- Holding your digital assets in an online account or wallet
- Transferring digital assets between wallets and accounts that you own
- Purchasing digital assets using real currency, including purchases through electronic platforms like Venmo or PayPal
An incorrect or misleading response to the updated digital asset question could create complications for you in the future. For instance, an improper response may result in various types of penalties. Accordingly, guidance and support from our experienced Dual Licensed Tax Attorneys and CPAs can be valuable when determining how to respond to the digital asset question in your case.
How to Report Digital Asset Income
U.S. taxpayers can use IRS Form 8949, Sales and Other Dispositions of Capital Assets, to calculate their gain or loss on digital asset transactions. Afterward, these assets should be reported on Schedule D (Form 1040) or Form 709. Form 1040 pertains to capital gains or losses, while Form 709 applies to digital assets awarded or received as gifts.
Furthermore, if an employee was compensated in digital assets, they must report the value of those assets they recovered as wages. Our Dual Licensed Tax Attorneys and CPAs can help our clients avoid issues regarding the reporting of digital assets.
Common Ways that U.S. Taxpayers Use Digital Assets
Typically, digital assets utilize peer-to-peer networks, also called blockchains, to safely and privately record transactions. Essentially, blockchains are public ledgers or databases that serve to memorialize users’ transactions. The decentralized nature of this ecosystem allows taxpayers to use digital assets in the following ways:
Exchanges
Exchanges are electronic platforms that facilitate the trading of digital assets. Users can buy, sell, exchange, and tokenize assets. The functions of digital asset exchanges are similar to those of securities or stock trading.
Marketplaces
Users can acquire goods and services using their digital assets at online marketplaces. Such purchases may be made for other types of digital assets, like NFTs, or be used to purchase tangible goods and services, like a new computer.
Decentralized Finance
Decentralized finance allows users to borrow assets, purchase insurance, participate in liquidity pools, trade cryptocurrency, or engage in many other applications without the need for a typical financial intermediary like a brokerage or bank. Decentralized financial transactions are facilitated by automated programs called “smart contracts.”
If You Have an Issue Regarding Digital Asset Reporting, Our Attorneys Can Help
If you have encountered an issue regarding digital asset reporting, get help from our experienced Dual Licensed Tax Attorneys and CPAs at the Tax Law Offices of David W. Klasing by calling (800) 681-1295.
Note:
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If you have failed to file a tax return for one or more years or have taken a position on a tax return that could not be supported upon an IRS or state tax authority audit, eggshell audit, reverse eggshell audit, or criminal tax investigation, it is in your best interest to contact an experienced tax defense attorney to determine your best route back into federal or state tax compliance without facing criminal prosecution.
