Reporting Cryptocurrency and Other Digital Assets on Your Tax Return
Accounting for and reporting digital asset-related income has become an important part of filing federal income tax returns. Failing to account for these assets can result in delayed refunds, fees, and other penalties, so if you own cryptocurrency or another digital asset and have questions about how to report it, it’s important to start working with an experienced tax attorney right away.
Digital Asset Questions for 2023
When filing their returns, taxpayers are asked specifically about their digital assets, namely, whether in 2023, they:
- Received a digital asset as payment, award, or reward for property or services; or
- Sold, exchanged, or disposed of a digital asset.
To answer this question, taxpayers will need to have a solid understanding of what qualifies as a digital asset, which is defined as a digital representation of value that is recorded on a secured, distributed ledger or other form of technology. The most common digital assets include:
- Cryptocurrency and convertible virtual currency;
- Stablecoins; and
- Non-fungible tokens (NFTs).
While they may not take the form of other more typical financial assets, digital assets are treated as property for tax purposes, which means that the same rules apply to transactions and reporting requirements come tax time.
Checking “Yes”
When answering the previous question, taxpayers must either check the “yes” or “no” box. Individuals should be sure to check “yes” if they:
- Received digital assets as payment, reward, or award;
- Received new digital assets from a mining or staking activity;
- Received digital assets as a result of a hard fork, which occurs when a cryptocurrency’s blockchain divides a single cryptocurrency into two;
- Disposed of digital assets in exchange for services or property;
- Disposed of digital assets in exchange for a different digital asset;
- Sold a digital asset; or
- Disposed of a financial interest in a digital asset.
Those to whom one or more of these transactions applies, besides checking the “yes” box will also need to report their income related to those digital asset transactions.
Checking “No”
Generally, taxpayers who only owned digital assets in 2023, but who didn’t engage in any transactions with those assets don’t need to check “yes” on the form. In fact, they can also check “no” if their financial activities were limited to:
- Holding digital assets in an account;
- Transferring digital assets from one of their accounts to another; or
- Purchasing digital assets using real currency.
To learn more about what kinds of digital asset-related transactions need to be reported to the IRS, please reach out to our legal team today.
Here to Help with Your Tax-Related Issues
If you own digital assets, like cryptocurrency and have questions about your obligations in regards to reporting those assets to the IRS on your tax return, feel free to call CPA, former FBI Special Agent, and experienced Florida tax return preparation lawyer Ronald Cutler, P.A. for advice. You can reach a member of our legal team by calling 386-490-9949 or by sending us an online message today.
Sources:
irs.gov/newsroom/taxpayers-need-to-report-crypto-other-digital-asset-transactions-on-their-tax-return
irs.gov/businesses/small-businesses-self-employed/digital-assets#description
