IRS Expands Digital Asset Question on Draft Version of 2022 Form 1040

September 8, 2022

At a glance

  • Main takeaway: For tax year 2022, the IRS seeks to expand Form 1040 reporting to require disclosure of transfers of digital assets, whether taxable or not.
  • Impact on your business: This is a welcome change in the tax community and a signal to taxpayers to start tracking their digital assets more closely.
  • Your business may be impacted. Aprio’s Technology and Blockchain CPA Services team can help you assess how the changes may affect you.

Schedule a consultation with Aprio today.

The full story:

The IRS seems to have a fascination when it comes to cryptocurrency and other digital assets. For tax year 2022, the IRS seeks to expand Form 1040 reporting to require disclosure of transfers of digital assets, whether taxable or not.

This is a welcome change in the tax community and a signal to taxpayers to start tracking their digital assets more closely.

The draft version of 1040 includes expanded questions about virtual currencies

The IRS has released a draft version of Form 1040 for next tax season, with an expanded question about virtual currencies, now referred to as digital assets, along with other changes on drafts of that form and related forms and schedules.

Questions about cryptocurrency have been included since 2019

The IRS first added a question about cryptocurrency to the 2019 Form 1040. The question has been tweaked slightly over the years, with 2022 having significantly expanded the scope of the question.

The digital asset question on the front page of Form 1040 now reads:

“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)?”

This new question expands on its previous version on Form 1040 for the tax year 2021, which states:

“At any time during 2021, did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency?”

One should note how the IRS changed the phrasing from virtual currency to digital assets, most likely to include non-fungible tokens and other evolutions in the digital asset world, many of which rose rapidly in value last year before seeing sharp declines.

The New draft reveals heightened specificity, shift from reporting to disclosure

Also, the IRS has introduced additional specificity, providing examples of how a taxpayer might receive a digital asset and expressly identifying “gifts” as subject to the reporting requirement.

Furthermore, the IRS has moved away from the reporting of mere financial activity, mandating disclosure of all inflows and outflows of digital assets regardless of whether the taxpayer has a financial interest.

This expansion of the Form 1040 reporting requirement comes behind Congress’s expansion of the reporting requirements for digital assets last year. In November, the Infrastructure Investment and Jobs Act made digital assets subject to the same Form 1099 requirements as traditional securities. Unlike the 2022 Form 1040, however, the Form 1099 requirements take effect January 1, 2024.

The bottom line

As the IRS delves further into the digital asset world, it is important to know that the future of digital asset tracking and reporting is now.

Within this ever-changing landscape, the resulting compliance and tax consequences can be impactful and Aprio’s blockchain and digital asset team can help you achieve the right level of planning. While you determine what’s next for you or your company, know that Aprio can help you get there.

Aprio’s Blockchain Tax Practice team can help you comply with filing requirements. Schedule a consultation today!

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Disclosures

Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding this matter.

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About the Author

Mitchell Kopelman

Mitchell is the partner-in-charge of Aprio’s Tax practice as well as the Technology & Biosciences group. He has been a partner since 1990 with Aprio, which is the largest Georgia-based tax, accounting and consulting firm. Mitchell works with companies in the software, gaming, clean tech, financial technology (FinTech), health care IT, processing, biosciences (biotech and medical device) and manufacturing industries. Whether a company is pre-revenue, starting up, growing or preparing for a liquidity event, Mitchell works with them to maximize their potential at each stage. He is known for promoting research, innovation and entrepreneurship by enabling companies to be successful, regardless of where they are in their business lifecycle.

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