The Internal Revenue Service could have a potential head-scratcher of a question about your crypto investments and what’s taxable, according to a major accountants’ association.
For two years, the IRS has been asking whether taxpayers have bought or sold cryptocurrency in the main “Form 1040” document that taxpayers submit for their federal income taxes. The inquiry asks about other potential crypto-related tax events too. It’s a “yes” or “no” question that taxpayers can’t leave blank.
Last year, the Form 1040’s asked: “Did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency?” (The wording differed slightly from the language appearing on the Form 1040 the year before that. The question first appeared in tax year 2019, on the Schedule 1.)
The prominent placement is a nod to the IRS’ increasingly sharp focus to ensure cryptocurrency investors completely meet their tax obligations.
Fast forward to next year’s tax returns: The IRS has proposed a draft question asking for next year’s Form 1040: “At any time during 2022, did you: (a) receive (as a reward, award, or compensation); or (b) sell, exchange, gift, or otherwise dispose of a digital asset (or a financial interest in a digital asset)?”
“For 2023, the IRS proposes asking: ‘At any time during 2022, did you: (a) receive (as a reward, award, or compensation); or (b) sell, exchange, gift, or otherwise dispose of a digital asset (or a financial interest in a digital asset)?’”
However, after the IRS unveiled that question’s proposed wording ahead of 2023’s tax season, the American Institute of CPAs recommended the tax agency get out its pencils and erasers. The tax agency needs to clarify the question to avoid taxpayer confusion, the organization said in its comment letter.
As a general matter, capital gains taxes will kick in on sales, exchanged coins, obtaining cryptocurrency through mining and other scenarios. But buying cryptocurrency and then just holding it has not counted as a taxable event. When jobs pay with cryptocurrency, for instance, they are typically treated as wages subject to employment tax, the IRS says.
In some ways, the newest version of the question is an improvement, said Annette Nellen, a tax professor at San Jose State University who chairs the AICPA’s virtual currency task force. But including the phrase “’digital asset’ is going to create new problems and new confusion,” she said.
Apart from cryptocurrency such as Bitcoin
BTCUSD,
-2.09%
or Ethereum
ETHE,
-3.85%
ETHUSD,
-2.10%,
using a phrase like “digital asset” raised questions if the IRS was also asking about nonfungible tokens (NFTs) and gaming currency like Fortnite’s V-Bucks or the Robux offered on Roblox
RBLX,
-5.70%,
AICPA noted.
The IRS has previously removed V-Bucks and Robux from examples of virtual currency that can convert to real-world money. But creating, buying and selling NFTs can have tax implications.
“After the IRS unveiled the proposed wording for a new question about digital assets ahead of 2023’s tax season, the American Institute …….