Anyone who sold crypto, received it as payment, or had other digital asset transactions needs to accurately report it on their tax return
The Internal Revenue Service reminds taxpayers they must answer the digital asset question and report all digital asset related income when they file their 2023 federal income tax return. Taxpayers should also keep these reporting guidelines in mind for 2024.
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.
With appropriate variations tailored for corporate, partnership, or estate and trust taxpayers, the digital asset question is:
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)?
What is a digital asset?
A digital asset is a digital representation of value that is recorded on a cryptographically secured, distributed ledger or any similar technology. Common digital assets include:
- Convertible virtual currency and cryptocurrency.
- Stablecoins.
- Non-fungible tokens (NFTs).
Digital assets are treated as property for tax purposes, and general property tax principles apply to any of these transactions.
Everyone must answer the question correctly
Everyone who files Forms 1040, 1040-SR, 1040-NR, 1041, 1065, 1120, and 1120S must check one box answering either “Yes” or “No” to the digital asset question. The question must be answered by all taxpayers, not just by those who engaged in a transaction involving a digital asset in 2023.
When to check “Yes”
Normally, a taxpayer must check the “Yes” box 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.
Report digital asset income
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 a digital asset, 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 a digital asset to customers in connection with a trade or business.
Keep in mind that most income is subject to taxation. Failing to accurately report income may result in accrued interest and penalties. This includes various sources of income such as interest earnings, unemployment benefits, and income derived from the service industry, gig economy, and digital assets. For further details, consult Publication 525, Taxable and Nontaxable Income.
When to check “No”
Normally, a taxpayer who just owned digital assets during 2023 can check the “No” box as long as they did not engage in any transactions involving a digital asset during the year. They can also check the “No” box if their activities were limited to one or more of the following:
- 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.
For a set of frequently asked questions (FAQs) and other details, visit the Digital Assets page on IRS.gov.
