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[US] IRS adds crypto question to more tax forms

January 22, 2024

The Internal Revenue Service has revised the question it has asked in recent years about income from digital assets such as cryptocurrency on the Form 1040 for individual taxpayers this tax season and added it for the first time to tax forms for estates, trusts, partnerships and C and S corporations.

The question now appears at the top of Forms 1041, U.S. Income Tax Return for Estates and Trusts; 1065, U.S. Return of Partnership Income; 1120, U.S. Corporation Income Tax Return; and 1120S, U.S. Income Tax Return for an S Corporation. And, as in recent years, it's once again at the top of Forms 1040, Individual Income Tax Return; 1040-SR, U.S. Tax Return for Seniors; and 1040-NR, U.S. Nonresident Alien Income Tax Return.

The IRS has also tweaked the wording on the various forms this year. Depending on the form, the digital assets question asks this basic question, with different variations, for corporate, partnership or estate and trust taxpayers:

"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)?"

Everyone who files Forms 1040, 1040-SR, 1040-NR, 1041, 1065, 1120, 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.

The IRS has made crypto more of a priority in recent years given the popularity of virtual currency such as Bitcoin and its use in hiding transactions from the traditional banking system. The IRS Criminal Investigation unit has also focused more on crypto-related crime in coordination with tax authorities in other countries.

Normally, a taxpayer needs to check the "Yes" box if they:

  1. Received digital assets as payment for property or services provided;
  2. Received digital assets resulting from a reward or award;
  3. Received new digital assets resulting from mining, staking and similar activities;
  4. Received digital assets resulting from a hard fork (a branching of a cryptocurrency's blockchain that splits a single cryptocurrency into two);
  5. Disposed of digital assets in exchange for property or services;
  6. Disposed of a digital asset in exchange or trade for another digital asset;
  7. Sold a digital asset; or
  8. Otherwise disposed of any other financial interest in a digital asset.

Along with checking the "Yes" box, taxpayers also need to report all the 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 last year have to use Form 8949, Sales and other Dispositions of Capital Assets, to compute their capital gain or loss on the transaction and then report it on Schedule D (Form 1040), Capital Gains and Losses. A taxpayer who disposed of any digital asset through a gift also will likely need to file Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return.

If employees were paid with digital assets, they have to report the value of the assets they received as wages. And if they worked as an independent contractor and were paid with digital assets, they have to report that income on Schedule C (Form 1040), Profit or Loss from Business (Sole Proprietorship). Taxpayers also need to use Schedule C if they sold, exchanged or transferred digital assets to customers in connection with a trade or business.

On the other hand, taxpayers who only owned digital assets during 2023 but didn't sell or transfer them can check the "No" box as long as 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:

  1. Holding digital assets in a wallet or account;
  2. Transferring digital assets from one wallet or account they own or control to another wallet or account they own or control; or
  3. Purchasing digital assets using U.S. or other real currency, including through electronic platforms.

[Accounting Today]

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