The Internal Revenue Service (IRS) has recently issued a clear reminder that taxpayers must again answer a digital asset question and report all digital asset related income when they file their 2023 federal income tax return. The question appears at the top of Form 1040 and was also added to additional tax forms for estates and trusts, partnerships and corporations.
Depending on the form, the IRS asks this basic question, with appropriate variations tailored for the type of taxpayer:
“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)?”
A digital asset is 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)
Everyone must answer the question
Everyone who files Forms 1040, 1040-SR, 1040-NR, 1041, 1065, 1120 and 1120S 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.
When to check “Yes”
Normally, 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 (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
- Otherwise disposed of any other financial interest in a digital asset
How to report digital asset income
In addition to checking the “Yes” box, 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. A taxpayer who disposed of any digital asset by gift may be required to file a gift tax return.
If an employee was paid with digital assets, they must report the value of assets received as wages. Similarly, if they worked as an independent contractor and were paid with digital assets, they must report that income on their Schedule C.
When to check “No”
Normally, a taxpayer who merely owned digital assets during 2023 can check the “No” box if they did not engage in any transactions involving digital assets during the year. They 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 another
Purchasing digital assets using U.S. or other real currency, including through electronic platforms.
For more information, contact Joe Becht, CPA, CGMA, Senior Manager at 716.633.1373 or jbecht@tsacpa.com.
