The IRS has added a question about income from digital assets to four forms covering partnerships, corporations, S corporations, and estates and trusts for 2023 tax returns.
The question appeared on 2022 returns for individuals, seniors, and nonresident aliens.
The question was tweaked this year for the various forms, the IRS said in a news release. But it basically asks: “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 question appears at the top of Forms 1040, U.S. Individual Income Tax Return; 1040-SR, U.S. Tax Return for Seniors; and 1040-NR, U.S. Nonresident Alien Income Tax Return. For tax year 2023 returns, it was added to 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.
All taxpayers must answer the question. If they answer “yes,” then they must report all income related to digital asset transactions, including any that were sold, exchanged, or transferred as a capital asset in 2023 or digital assets that were given as a gift. An employee who was paid with digital assets must report the value of assets as wages, and independent contractors must report digital asset payments as well.
Taxpayers, according to the IRS, can answer “no” if they did not engage in any transactions involving digital assets or if their activities were limited to 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 purchasing digital assets using U.S. or other real currency, including through electronic platforms.
Taxpayers can visit the IRS digital assets page for more information.
The change comes as the IRS grapples with how to handle digital assets. In November, crypto industry advocates told the IRS during a public hearing that its definition of “broker” in proposed regulations was too broad and added to security and privacy concerns. The IRS released those long-awaited proposed regulations in August.
The AICPA Digital Assets Tax Task Force commented on the issue of adding the question about digital assets to new forms in a letter sent in July 2023 to IRS and Treasury officials. This followed three previous letters about the Form 1040 digital assets questions, instructions, and recommended FAQs.
The AICPA Tax Section also has included the digital assets question in its updated 2023 Annual Tax Compliance Kit tax return checklists and organizers.