On 1/22/24, the IRS reminded taxpayers that they must again answer the digital asset 2023 question on Forms 1040 and 1040-SR and report all digital asset related income when they file their 2023 federal income tax return, as they did for their 2022 federal tax returns for Digital Assets in 2022. The 1040 2023 Instructions instruct all taxpayers to answer the digital asset 2023 question on Forms 1040 and 1040-SR as follows: “Do not leave this field blank. The question must be answered by all taxpayers, not just taxpayers who engaged in a transaction involving digital assets”.

Digital Asset 2023 Question

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)? (See instructions.) Yes or No.

Where does the Digital Asset 2023 Question appear?

The question appears 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, and was revised this year to update wording. The question was also added to these additional forms: Forms 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.

Digital Assets IRS Definition

Digital representations of value that are recorded on a cryptographically secured distributed ledger or any similar technology. For example, digital assets include non-fungible tokens (NFTs) and virtual currencies, such as cryptocurrencies and stablecoins. If a particular asset has the characteristics of a digital asset, it will be treated as a digital asset for federal income tax purposes. In addition,

• Digital assets include: Convertible virtual currency and cryptocurrency, Stablecoins and Non-fungible tokens (NFTs).
• Digital assets are not real currency (also known as “fiat”) because they are not the coin and paper money of the United States or a foreign country and are not digitally issued by a government’s central bank.
• A digital asset that has an equivalent value in real currency, or acts as a substitute for real currency, has been referred to as convertible virtual currency.
• A cryptocurrency is an example of a convertible virtual currency that can be used as payment for goods and services, digitally traded between users, and exchanged for or into real currencies or digital assets.

Taxpayers must check “Yes” on the Digital Asset 2023 Question 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.

Taxpayers can check “No” on the Digital Asset 2023 Question if they:

• Did not engage in any transactions involving digital assets during the year;
• Are 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
• Purchased digital assets using U.S. or other real currency, including through electronic platforms.

Taxpayers must Report Digital Assets 2023 Income

The IRS states that: In addition to checking the “Yes” box, taxpayers must report all income related to their digital asset transactions. For example, an investor who held a digital asset as a capital asset and sold, exchanged, or transferred it during 2023 must use Form 8949, Sales and other Dispositions of Capital Assets, to figure their capital gain or loss on the transaction and then report it on Schedule D (Form 1040), Capital Gains and Losses. A taxpayer who disposed of any digital asset by gift may be required to file Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return.

If an employee was paid with digital assets, they must report the value of assets received as wages. Similarly, if they worked as an independent contractor and were paid with digital assets, they must report that income on Schedule C (Form 1040), Profit or Loss from Business (Sole Proprietorship). Schedule C is also used by anyone who sold, exchanged, or transferred digital assets to customers in connection with a trade or business.

Is your Tax Preparer an expert in Digital Assets?

Taxpayers that engage in the digital asset space ought to work with a professional tax advisor that has experience and expertise in providing tax, accounting, and advisory solutions suited for the digital asset landscape. Particularly now that the IRS has added the digital asset question for the first time to tax forms for estates, trusts, partnerships and C and S corporations.

Who is your digital asset tax expert?