IRS adds cryptocurrency income tax question to four more tax forms

The IRS on Jan. 22 reminded all taxpayers to answer a question about digital assets and report all digital asset-related income.

The question asks 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)?”

The IRS defined digital assets as including convertible virtual currency and cryptocurrency, stablecoins, and non-fungible tokens (NFTs).

The latest update notably expands the number of forms that include the question. Originally, the question appeared on three variants of the Form 1040 income tax return aimed at individuals, seniors, and non-resident aliens.

Now, the IRS says the question has been added to four new income tax forms: Form 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 1120-S, U.S. Income Tax Return for an S Corporation (a specific type of small business).

All taxpayers must answer “yes” or “no’

The IRS emphasized that all taxpayers must respond even if they did not engage in any digital asset transactions, either answering “yes” or “no.”

Taxpayers must answer “yes” to the digital asset question if, during the 2023 tax year, they received digital assets as payment, as a reward, from mining and staking, from a hard fork, or if they disposed of or sold digital assets in various ways. They must also report that income accordingly.

Taxpayers may answer “no” if they did not engage in digital asset transactions, merely held digital assets, transferred digital assets between their wallets or accounts, or purchased digital assets with U.S. dollars or other real currency.

Critically, this means that investors must answer “yes” if they disposed of (i.e. traded) one digital asset for another digital asset, but they may answer “no” if they purchased digital assets in the USD or cash transactions described above.

The question is unrelated to a controversial tax rule that requires businesses to report received transactions above $10,000 within 15 days. The IRS said on Jan. 16 that this rule currently applies to cash but not digital assets.