Do Taxpayers Need to Report Cryptocurrency When Filing 2023 Tax Returns?

 Posted on March 28, 2023 in Taxation Law

The rise of virtual currencies such as Bitcoin and Ethereum has created a new world of digital assets, which have become increasingly popular with investors in recent years. But while there are numerous potential benefits of investing in cryptocurrency, the tax laws that apply to owning, selling, or trading these assets can sometimes be unclear for many. During the 2023 tax season, taxpayers may be wondering how their cryptocurrency or other digital asset investments will be addressed on their tax returns. Fortunately, the IRS has provided guidance on these issues, ensuring that crypto earnings can be reported correctly while maintaining compliance with IRS regulations.

Reporting Digital Assets on Tax Returns

For tax year 2021, a question was added to the 1040 tax return form asking taxpayers if they received, sold, or exchanged cryptocurrency during that year. This question has been included on tax returns for 2022 as well, although it has been updated to refer to "digital assets." According to the IRS, digital assets include cryptocurrencies and virtual currencies that can be converted to money or other assets, as well as "stablecoins," which are cryptocurrencies that have been tied to the value of other commodities or financial instruments in order to avoid fluctuations in value. Digital assets also include non-fungible tokens (NFTs).

While people who have engaged in cryptocurrency transactions will be required to report these transactions on their tax returns, there are other situations where digital assets must be reported, including:

• Virtual currencies were received as payment for performing services or exchanging goods or property.

• Digital assets were given or received as gifts.

• Cryptocurrencies were received through "mining," "hard forks," or similar activities.

• Virtual currencies or other digital assets were used to pay for goods or services.

• Digital assets were traded for other digital assets.

• Digital assets were sold for actual currency.

• A person's interests in digital assets were disposed of in any other way.

Because digital assets are treated the same as other assets owned by a taxpayer, gains or losses from transactions involving these assets must be reported. Form 8949 (Sales and Other Dispositions of Capital Assets) can be used to calculate the taxable gain or loss from these transactions, which can then be reported on Form 1040 Schedule D. An employee who received digital assets as wages must report these payments as taxable income. Independent contractors who were paid with digital assets can report this income on Form 1040 Schedule C.

There are certain situations where taxpayers who own cryptocurrency can answer "No" to the question about digital assets, and they will not need to report these assets on their tax returns. A person who held assets in a digital wallet or account or transferred assets from one wallet or account to another will not need to report cryptocurrency so long as they did not engage in any transactions with other parties. In addition, purchases of cryptocurrency using U.S. currency or the currency of another country will not need to be reported.

Contact Our San Jose, CA Tax Lawyer for Questions about Cryptocurrency

Understanding how taxes apply to virtual currencies and other digital assets is not always easy. Failure to report transactions or pay applicable taxes could result in significant penalties. At John D. Teter Law Offices, we can provide guidance on how to address these issues as well as representation during tax audits. If you have questions about how cryptocurrency may affect your taxes, contact our San Jose tax attorney at 408-866-1810 and set up a consultation.

Sources:

https://www.irs.gov/newsroom/irs-updates-to-question-on-digital-assets-taxpayers-should-continue-to-report-all-digital-asset-income

https://www.investopedia.com/terms/s/stablecoin.asp