The U.S Internal Revenue Service (IRS) recently published an early release draft of its tax form, with updated rules for reporting digital assets.
The revised draft for Form 1040 included an expanded digital asset section outlining taxation requirements for non-fungible tokens (NFTS) and stablecoins.
Along with instructions on how taxpayers should list their crypto transactions, the 2022 updated tax draft changes the verbiage from “virtual currency” to “digital assets,” making room for other crypto-related developments.
The form draft clarifies the meaning of digital assets as “any digital representations of value that are recorded on a cryptographically secure distributed ledger or any similar technology.
For example, digital assets include non-fungible tokens (NFTs) and virtual currencies, such as cryptocurrencies and stablecoins.” It explained that, as long as the asset bore the characteristics of a digital asset, it would be treated as such for federal income tax purposes.
Miles Fuller, former senior counsel with the Office of the Chief Counsel at the IRS, commended the change, explaining that it showed the agency was preparing more guidance.
“The IRS is ramping up by coalescing their terminology around this digital asset term in the statute. So, it’s more likely than not that shortly, we’re going to see those regs come out, and the IRS continues to move forward with some implementation of a regulatory regime. Probably sooner rather than later,” he said.
On form 1040, taxpayers are to check the “yes” box if they fit into any of the categories:
- Received digital assets, either as a reward, award, or payment for property or services
- Sold, exchanged, gifted, or through any means disposed of digital assets or any financial interest in digital assets.
They are also to check “yes” if, in 2022, they
- Received digital assets as payment for property or services provided.
- Received new digital assets due to mining, staking, and similar actions.
- Received digital assets due to a hard fork
- 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.
- Transferred digital assets without receiving any consideration.
- Otherwise disposed of any other financial interest in a digital asset.
While owning a record of a digital asset, ownership in the form of a stake in an account that holds digital assets, and having a wallet are conditions that establish financial interest; taxpayers are not mandated to choose “yes,’ if they meet any of these requirements or have performed these actions in 2022.
- Holding a digital asset (crypto, stablecoins, NFTs) in a wallet or account.
- Transferring a digital asset from one wallet or account they own or control to another that belongs to them.
- Purchasing digital assets using US. or other actual currency through electronic platforms like Venmo and PayPal. Here “real currency” refers to fiat.
In this section, the draft clarifies that the questions cannot be left unanswered, irrespective of whether the taxpayer is a crypto user.
They are directed to check either ‘yes’ or ‘no’ in the appropriate boxes.
Additionally, a template is provided for crypto users who have disposed of digital assets this year to calculate capital loss or gain for report purposes. The same goes for digital assets taxpayers who received said assets as compensation for services.
The current draft states that it is “not for filing” as unexpected issues occasionally arise, requiring a change to the previously posted draft. While this gives an overall idea of what crypto users expect when paying taxes, it is an instruction form not to rely entirely on for filing.
An article by Bloomberg quotes Lisa Zarlenga, a Steptoe & Johnson LLP partner, explaining that instruction forms are not binding guidance and might become a problem in tax disputes.
“When you think about it, as a practical matter, most everyday taxpayers rely on the instructions when filling out their tax forms. And so, it seems kind of unfair that if they relied on something that these instructions said, and the IRS challenged it, they wouldn’t be able to point it out in court and say this is something I relied on,” she said.
In any news, the IRS can now hunt down crypto tax evaders, so getting up-to-date information on the tax payment requirements for crypto assets is a must for every American crypto user.
