The Internal Revenue Service (IRS) has released a list of reporting requirements for the general public dealing with cryptocurrencies as the deadline approaches for filing the 2022 federal income tax return.
IRS Reminds Taxpayers of Crypto Income Reporting Requirements Ahead of 2022 Filing
Until 2021, the IRS used the term “virtual currencies” in income tax-related reporting forms, which have been updated to “digital assets.” All U.S. citizens must answer questions about cryptocurrencies “regardless of whether they engaged in any transactions involving digital assets.”
The question about digital asset income features in three forms: 1040, Individual Income Tax Return; 1040-SR, U.S. Tax Return for Seniors; and 1040-NR, the U.S. Nonresident Alien Income Tax Return. The question 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)?”
IRS Digital Asset Reporting Requirements for 2022 Federal Tax Returns
While all tax filers are required to answer the above question with a yes or no, the IRS provided nine instances when one must check “Yes”:
- 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;
- 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.
In addition to checking “yes,” eligible taxpayers are required to report all income related to their digital asset transactions. The only instances when one can check “No” in the filing is if they have been purely holding the crypto assets, transferred assets between wallets they own or purchased cryptocurrencies against fiat currencies.
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IRS Tax Reporting Requirements for Cryptocurrency Transactions: Understanding Capital Gains and Income Tax
The IRS considers cryptocurrency to be a form of property, rather than currency, for tax purposes. This means that when a taxpayer buys, sells, or trades cryptocurrency, they may be subject to capital gains taxes on any resulting profit. Additionally, those who receive cryptocurrency as payment for goods or services must report it as income on their tax return.
It’s important to note that while some countries have yet to fully regulate and tax cryptocurrency, the IRS has been cracking down on noncompliance in recent years. In 2019, they sent out thousands of warning letters to taxpayers who may have failed to report their cryptocurrency transactions.
Reporting Cryptocurrency Transactions on Tax Returns: IRS Guidelines and Requirements
To report cryptocurrency transactions on a tax return, taxpayers typically need to fill out Form 8949, Sales and Other Dispositions of Capital Assets, and report their capital gains or losses on Schedule D. The IRS also has a virtual currency questionnaire on Form 1040 for taxpayers to indicate if they have engaged in any virtual currency transactions.
It’s important for taxpayers to keep accurate records of all their cryptocurrency transactions, including the date of purchase, sale or trade, the fair market value of the cryptocurrency at the time of the transaction, and any associated costs such as transaction fees.
Understanding Cryptocurrency Taxation: IRS Reporting Requirements and State Laws
It’s also worth mentioning that in recent years, some states have started to propose laws that would tax cryptocurrency differently, or even allow for the use of cryptocurrency in paying taxes. For example, the state of Arizona proposed a bill that would allow residents to pay their taxes using cryptocurrency, and the state of New Hampshire has considered exempting some cryptocurrency transactions from state taxes.
In summary, the IRS considers cryptocurrency to be a form of property for tax purposes and require taxpayers to report any resulting gains or losses on their tax returns. As the use and acceptance of cryptocurrency continues to grow, it’s likely that tax laws and regulations surrounding it will continue to evolve. It’s important for taxpayers to stay informed and compliant with the current tax laws to avoid any potential penalties or legal issues.
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