Crypto continues to attract investors, generate headlines, and garner attention from the U.S. Treasury. As a result, the Internal Revenue Service (IRS) is reminding taxpayers about reporting “digital assets” on 2022 federal tax returns.
The crash and burn of crypto exchange FTX drove home the realities of virtual currency once again this winter. The impact of the management style of FTX ex-CEO Sam Bankman-Fried is evident up and down the blockchain. Most recently, FTX solicited the return of the political donations and contributions it already made. While asking nicely, the debtor group in the FTX bankruptcy also mention legal pursuit to recover any unreturned funds.
The morass around the FTX meltdown underscores the sharp focus of the IRS on its pursuit of eligible tax proceeds from those who invest in or own convertible virtual currency, stablecoin, or non-fungible tokens (NFTs).
Tax regulations around virtual currency have tightened to make tax fraud and tax crime around crypto more difficult. With the 2022 tax season upon us, here are some things you need to know about reporting crypto and other virtual currency:
- The IRS is using the term “digital asset” to refer to any virtual currency.
- Just as in 2021, all taxpayers must answer the question about involvement with digital assets on their 2022 federal income tax return. Even if you have never considered purchasing or been involved with any transaction involving digital coinage, the question must be answered “yes” or “no.”
- According to the IRS, just some of the types of transactions that must be reported include the sale, exchange, or trade of a digital asset, receipt of such an asset through a number of methods, transferring digital assets in a way that exceeds the annual gift exclusion amount and more.
- Likewise, people who are paid with digital assets must report that value received as earnings.
- If you owned digital assets in 2022, and did not engage in transactions, you may be able to check the IRS question box “No.” This would be for instances when owners of digital assets maintain them in a wallet or account or transfer the currency between two accounts or wallets that they own.
When in doubt, check out the 1040 instructions for 2022 (page 15 for digital assets). And when you are concerned about tax implications, digital asset audits (yes, they do occur), or other crypto tax questions—speak with a knowledgeable tax attorney for answers.
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Serving local and international clients from offices in Chicago and Cleveland, the tax group at Robert J. Fedor, Esq., LLC helps you respond strategically to questions about cyber disclosure, federal income tax requirements, or allegations surrounding fraudulent tax returns. Call 800-579-0997 or contact us today.