All taxpayers must check either “yes” or “no” to the digital asset question
The Internal Revenue Service has issued a reminder to taxpayers regarding the inclusion of a digital asset question in their 2023 federal income tax return. This requirement is consistent with the procedure followed in the 2022 federal tax returns.
The digital assets question is prominently featured 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. Notably, the wording of the question has been updated for the current year. Additionally, the question has been introduced to other forms such as 1041, 1065, 1120, and 1120-S.
The question pertains to digital assets and is tailored to corporate, partnership, or estate and trust taxpayers. It inquires whether the taxpayer, at any point in 2023, received or disposed of a digital asset, with variations based on the taxpayer type.
Defining A Digital Asset
A digital asset, as defined by the IRS, is a digital representation of value recorded on a cryptographically secured, distributed ledger or similar technology. Examples of common digital assets include convertible virtual currency, cryptocurrency, stablecoins, and non-fungible tokens (NFTs).
All filers of Forms 1040, 1040-SR, 1040-NR, 1041, 1065, 1120, 1120, and 1120S are required to respond to the digital asset question by checking either "Yes" or "No."
This obligation applies to all taxpayers, regardless of whether they engaged in digital asset transactions during 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
Apart from indicating a "Yes" response, taxpayers are obligated to disclose all income associated with their digital asset transactions. To illustrate, an investor who possessed a digital asset as a capital asset and engaged in activities like selling, exchanging, or transferring it in 2023 must utilize Form 8949, Sales and other Dispositions of Capital Assets, to compute their capital gain or loss from the transaction. Subsequently, they must report this information on Schedule D (Form 1040), which focuses on Capital Gains and Losses.
In instances where a taxpayer has disposed of a digital asset as a gift, there might be a requirement to submit Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return.
For individuals who received payment in the form of digital assets as employees, it is essential to report the value of these assets as wages. Similarly, if someone operated as an independent contractor and received compensation in digital assets, this income should be reported on Schedule C (Form 1040), specifically designed for Profit or Loss from Business (Sole Proprietorship). Schedule C is also applicable to those who conducted transactions involving the sale, exchange, or transfer of digital assets to customers within the context of a trade or business.
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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.
Further details and frequently asked questions (FAQs) can be found on the Digital assets page on IRS.gov.
Source: irs.gov
Important Disclosures
Content in this material is for educational and general information only and not intended to provide specific advice or recommendations for any individual.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
This article was prepared by FMeX.
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