Written By: Ryan Mink, CPA
The IRS recently issued a reminder that all taxpayers must answer, either “Yes” or “No”, a digital asset question and report all digital asset-related income when they file their 2022 federal income tax return, as they did for fiscal year 2021, regardless of whether they engaged in any transactions. The term “digital assets” has replaced “virtual currencies,” a term used in previous years.
The question appears at the top of Form 1040 just after your name and address.
What is a digital asset?
A digital asset is a digital representation of value which is recorded on a cryptographically secured, distributed ledger. Common digital assets include:
- Convertible virtual currency and cryptocurrency
- Stablecoins
- Non-fungible tokens (NFTs)
When to check “Yes”?
You need to check yes if you:
- Received digital assets as payment for property or services provided;
- Transferred digital assets for free (without receiving any consideration) as a bona fide gift;
- 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; or
- Otherwise disposed of any other financial interest in a digital asset.
Income related to digital assets are generally reported as a capital gain or loss reported on Form 8949 and Schedule D. However, staking, mining, farming, and other rewards or payments may be reported in a different location. Payments received for services as an independent contractor would be reported on Schedule C.
When to check “No”?
If you:
- Held digital assets in a wallet with no other transactions
- Transferred digital assets between wallets controlled by you
- Purchased digital assets using fiat currency, including through electronic platforms like PayPal and Venmo.
If you have questions about digital assets and related activity please reach out to our team. Our staff have active crypto experience with digital assets including but not limited to mining, farming, staking, trading, and the related tax reporting obligations. With clients operating mining farms and developing NFT projects we’ve got the expertise you are looking for.