The IRS on January 22 reminded all taxpayers to answer a question about digital assets and report all income from digital assets.
The question is asked to taxpayers:
“At any time during 2023, did you: (a) receive (as a reward, distinction 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)?”
The IRS defined digital assets as including convertible virtual currencies and cryptocurrency, stablecoins and non-fungible tokens (NFTs).
In particular, the latest update expands the number of forms in which the question appears. The question originally appeared on three variants of the Form 1040 income tax return, aimed at individuals, seniors and non-resident aliens.
Now the IRS says the question has been added to four new income tax forms: Form 1041, U.S. Income Tax Return for Estates and Trusts; 1065, US return of partnership income; 1120, US income tax return; and 1120-S, U.S. Income Tax Return for an S Corporation (a specific type of small business).
All taxpayers must answer “yes” or “no.”
The IRS emphasized that all taxpayers should respond, even if they have not made any digital asset transactions, by answering “yes” or “no.”
Taxpayers must answer “yes” to the digital asset question if they received digital assets during the 2023 tax year as payment, as a reward, from mining and staking, from a hard fork, or if they disposed of or sold digital assets in various ways . They must also report that income accordingly.
Taxpayers can answer “no” if they have not transacted with digital assets, own only digital assets, transferred digital assets between their wallets or accounts, or purchased digital assets with US dollars or other real currency.
Crucially, this means that investors must answer “yes” if they have sold (i.e. exchanged) a digital asset for another digital asset, but they can answer “no” if they have purchased digital assets in USD or with cash transactions as described above.
The question has nothing to do with a controversial tax rule that requires companies to report transactions of more than $10,000 received within 15 days. The IRS said on January 16 that this rule currently applies to cash, but not digital assets.