The IRS has updated terminology regarding digital asset income. Be mindful of this as you file your 2022 federal income tax return.

What counts as a digital asset?

A digital asset is any piece of content stored digitally. This includes convertible virtual currency and cryptocurrency, non-fungible tokens (NFTs) and stablecoins.

The IRS has replaced the term “virtual currencies” with “digital assets” so that the term encompasses more than just cryptocurrencies like Bitcoin.

What is the digital asset question?

All filers must check either “yes” or no” to the question:

"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)?"

Be sure to check “yes” if you:

• Were paid for property or services with digital assets
• Transferred digital assets for free as a bona fide gift;
• Received
  • New digital assets from mining, staking and similar activities;
  • Digital assets from a reward or award;
  • Digital assets from a hard fork (a branching of a cryptocurrency's blockchain that splits a single cryptocurrency into two);
• Disposed of:
  • Digital assets in exchange for property or services;
  • Digital asset in exchange for another digital asset;
• Sold a digital asset; or
• Otherwise disposed of any other financial interest in a digital asset.

Check no if you:

• Owned digital assets last year but did not buy or sell any
• Held digital assets in a wallet or account
• Transferred digital assets from one wallet/account you own to another
• Bought digital assets with U.S. or other real currency (including through PayPal, Venmo and other electronic platforms)

How do you report digital asset income?

Taxpayers are required to report all income related to their digital asset transactions, in addition to checking the yes box.

You must use form 8949, Sales and other Dispositions of Capital Assets if you held a digital asset as a capital asset and sold, exchanged or transferred it during 2022. This form calculates your capital gain or loss on the transaction—you then report that information on Schedule D of 1040, Capital Gains and Losses.

If you were paid with digital assets, you are required to report the value of assets received as wages. The same goes for independent contractors who were paid with digital assets. (Schedule C on form 1040. Profit or Loss from Business (Sole Proprietorship))

Questions? Contact us.