Federal

 

ssue Number:    IR-2024-18

Inside This Issue

Taxpayers should continue to report all cryptocurrency, digital asset income

WASHINGTON — The Internal Revenue Service today reminded taxpayers that they must again answer a digital asset question and report all digital asset related income when they file their 2023 federal income tax return, as they did for their 2022 federal tax returns.

The question appears 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, and was revised this year to update wording. The question was also added to these additional forms: 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.

Depending on the form, the digital assets question asks this basic question, with appropriate variations tailored 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)?”

What is a digital asset?
A digital asset is a digital representation of value that is recorded on a cryptographically secured, distributed ledger or any similar technology. Common digital assets include:

  • Convertible virtual currency and cryptocurrency.
  • Stablecoins.
  • Non-fungible tokens (NFTs).

Everyone must answer the question
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.

When to check “Yes”
Normally, a taxpayer must check the “Yes” box if they:

  • Received digital assets as payment for property or services provided;
  • Received digital assets resulting from a reward or award;
  • Received new digital assets resulting from mining, staking and similar activities;
  • Received digital assets resulting 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;
  • Disposed of a digital asset in exchange or trade for another digital asset;
  • Sold a digital asset; or
  • Otherwise disposed of any other financial interest in a digital asset.

How to report digital asset income
In addition to checking the “Yes” box, taxpayers must report all 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 during 2023 must use Form 8949, Sales and other Dispositions of Capital Assets, to figure 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 by gift may be required to file Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return.

If an employee was paid with digital assets, they must report the value of assets received as wages. Similarly, if they worked as an independent contractor and were paid with digital assets, they must report that income on Schedule C (Form 1040), Profit or Loss from Business (Sole Proprietorship). Schedule C is also used by anyone who sold, exchanged or transferred digital assets to customers in connection with a trade or business.

When to check “No”
Normally, a taxpayer who merely owned digital assets during 2023 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:

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

Issue Number: Tax Tip 2024-02

The Taxpayer Bill of Rights protects all taxpayers year-round

The Taxpayer Bill of Rights is the 10 rights all taxpayers have any time they interact with the IRS. These rights cover a wide range of topics and issues, and they explain what taxpayers can expect if they need to work with the IRS on a tax matter. This includes when a taxpayer files a return, pays taxes, responds to a letter or notice, goes through an audit or appeals an IRS decision.

Taxpayer Bill of Rights

Taxpayers have a right to:

  • Be Informed – The right to know what to do to comply with the tax laws. 
  • Quality Service – The right to receive prompt, courteous and professional assistance when working with the IRS. 
  • Pay No More than the Correct Amount of Tax – The right to pay only the amount of tax legally due, including interest and penalties, and to have the IRS apply all tax payments properly. 
  • Challenge the IRS’s Position and Be Heard – The right to raise objections and provide additional documentation in response to formal IRS actions or proposed actions. 
  • Appeal an IRS Decision in an Independent Forum – The right to a fair and impartial administrative appeal of most IRS decisions. 
  • Finality – The right to know when the IRS has finished an audit. 
  • Privacy – The right to expect that any IRS inquiry, examination or enforcement action will comply with the law and be no more intrusive than necessary.
  • Confidentiality – The right to expect that any information taxpayers provide to the IRS will not be disclosed unless authorized by the taxpayer or by law. 
  • Retain Representation – The right to retain an authorized representative of the taxpayer’s choice to represent them when working with the IRS. Taxpayers have the right to seek assistance from a Low Income Taxpayer Clinic if they cannot afford representation. 
  • A Fair and Just Tax System – The right to expect the tax system to consider facts and circumstances that might affect their underlying liabilities, ability to pay or ability to provide information timely.

More Information:
Taxpayer Advocate Service