Insight Article

The IRS updates its defintion of digital assets for tax purposes

March 14, 2023 | by Kushner LaGraize, LLC

The Internal Revenue Service (IRS) has slightly changed the wording of the tax forms for the 2022 tax year regarding the declaration of cryptocurrency transactions by taxpayers.

A shift in terminology

In this year's tax-filing season, the IRS changed the term "virtual currency" to "digital asset" on Form 1040 and its variants, the 1040-SR, and the 1040-NR, to encompass a broader range of digital assets, including non-fungible tokens and stablecoins.

The digital asset question

The IRS has revised the instructions for answering the digital asset question and clarified it for taxpayers. For the 2022 tax year, the form asks: "At any time during 2022, did you: (a) receive (as a reward, award or payment for property or services); or (b) sell, exchange, gift or otherwise dispose of a digital asset (or a financial interest in a digital asset)?" For clarification, "received" means any digital assets received as payment (either as an employee or independent contractor); it does not apply to digital assets purchased with after-tax income.

If yes, taxpayers must check the appropriate box and report all the relevant income associated with the digital asset transactions.

Not all cryptocurrency owners are required to check the yes box. If a taxpayer merely owned digital assets in 2022 but didn't engage in any transactions, they can check the no box. This also applies if their activities were limited to holding digital assets in a wallet, transferring digital assets from one wallet to another, or purchasing digital assets using real currency.

Changes to Tax Forms

An investor who held a digital asset as a capital asset and sold, exchanged, or transferred it in 2022 will need to use Form 8949 to calculate their capital gain or loss and then report it on Schedule D (Form 1040) or Form 709 (if a gift). Similarly, employees who received digital assets as payment for their services will need to report the value of assets received as wages. Independent contractors paid with digital assets will need to report that income on Schedule C (Form 1040).

This article is intended to provide a brief overview of the IRS's recent clarification on cryptocurrency and is not a substitute for speaking with one of our expert advisors. For more information, please contact our office.