All taxpayers must respond to a question about digital assets on their 2022 tax forms.

On the second day of the 2023 filing season, the IRS reminded taxpayers that any digital asset-related income must be declared when they submit their 2022 federal income tax returns.

This year, the IRS has replaced the word “virtual currency” with “digital assets,” a term that includes not only cryptocurrencies but also stablecoins and nonfungible tokens.

“A digital asset is a digital representation of value that is recorded on a cryptographically secure, distributed ledger,” the IRS explained on January 24.

All taxpayers must answer a question on digital assets on their 2022 income tax forms. According to the IRS, anyone filing Form 1040, Form 1040-SR, or Form 1040-NR must tick one box, replying “Yes” or “No” to the digital asset inquiry.

Taxpayers must check the “Yes” box if they:

1. Received digital assets in exchange for property or services;
2. Digital assets were given as a genuine gift, free of charge and without payment;
3. Digital assets that were received as a result of a prize or award;
4. New digital assets obtained as a result of mining, staking, and similar actions;
5. Received digital assets as a result of a hard fork, which is when the blockchain of one coin separates into two;
6. A transaction where digital assets are exchanged for goods or services;
7. A digital asset was exchanged or traded for another digital one.
8. A digital asset was sold or any other financial stake in a digital asset was otherwise disposed of.

Along with ticking the “Yes” box, taxpayers must record all revenue related to their digital asset transactions, which may necessitate the filing of additional tax forms. For instance, a shareholder who owned a digital asset as a capital asset and sold, swapped, or transferred it in 2022 would have to figure out their capital gain or loss on the transaction using Form 8949, Sales and Other Dispositions of Capital Assets, and then report it on Schedule D (Form 1040), Capital Gains and Losses, or Form 709, United States Gift (and Generation-Skipping Transfer Tax Return), in the case of a gift.

According to the IRS, if an employee was paid in digital assets, they must declare the value of the assets received as wages. Likewise, if they worked as an independent contractor and were compensated in digital assets, they must declare that revenue on Schedule C (Form 1040), Profit or Loss from Business (Sole Proprietorship). According to the IRS, anyone who sold, swapped, or transferred digital assets to clients in the course of a trade or business must file Schedule C.

However, the IRS stated that taxpayers who just owned digital assets in 2022 might mark the “No” box as long as they did not engage in any digital asset transactions throughout the year. If their activities were restricted to one or more of the following, they can also check the “No” box:

• maintaining a digital wallet or account with digital assets;
• transferring digital assets between wallets or accounts they control or own, or from one wallet to another; or
• Buying digital assets using US or other real dollars, even via electronic systems like PayPal and Venmo.

See the Digital Assets page on IRS.gov and page 15 of the Tax Year 2022 1040 (and 1040-SR) Instructions for more details.

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