IRS Warns Taxpayers They Must Answer a New Question on Tax Forms or Face Consequences

On Tuesday, the Internal Revenue Service issued a warning to taxpayers, stating that they must report all digital asset-related income and answer a new digital asset question on their 2022 federal income tax return or face consequences, such as delayed refunds or penalties. 

In a Jan. 24 release, the IRS reminded citizens of a key change on 1040 forms this year. The agency replaced the term “virtual currency” with “digital assets,” in addition to some other modifications to the wording.

The yes-or-no question, which was expanded and revised this year to update terminology, reads, “At any time during 2022, did you: (a) receive (as a reward, award or payment for property or services); or (b) sell, exchange, gift or otherwise dispose of a digital asset (or a financial interest in a digital asset)?”

The question appears at the top of tax form 1040 Individual Income Tax Return, 1040-SR U.S. Tax Return for Seniors, and 1040-NR U.S. Nonresident Alien Income Tax Return.

“All taxpayers must answer the question regardless of whether they engaged in any transactions involving digital assets,” the agency stated.

All income must be accurately reported based on the United States Tax Code, including income from digital assets on federal income tax returns. Failure to do so could result in noncompliance with tax laws and possible penalties.

The IRS also provided a detailed explanation of what is considered a digital asset, including stablecoins, cryptocurrencies and non-fungible tokens, or NFTs.

The IRS issued a list of transactions that may result in taxable gain or loss, which include the following:

• Sale of a digital asset for fiat
• Exchange of a digital asset for property, goods, or services
• Exchange or trade of one digital asset for another digital asset
• Receipt of a digital asset as payment for goods or services
• Receipt of a new digital asset as a result of a hard fork
• Receipt of a new digital asset as a result of mining or staking activities
• Receipt of a digital asset as a result of an airdrop
• Any other disposition of a financial interest in a digital asset
• Receipt or transfer of a digital asset for free (without providing any consideration) that does not qualify as a bona fide gift
• Transferring a digital asset as a bona fide gift if the donor exceeds the annual gift exclusion amount

Any taxpayer who ticks the “Yes” box must report all income related to their digital asset transactions on relevant forms. 

Taxpayers should check the “No” box if they owned digital assets but didn’t make any transactions involving them in 2022 or if they merely transferred digital assets from one wallet or account they own or control to another one that they own or control and if they bought digital assets using real currency like the U.S. dollar.

The IRS also issued a warning that taxpayers may see a smaller refund this tax season due to changes to tax law, including the expiration of pandemic-related stimulus payments, which would have boosted refund balances. 

“Due to tax law changes such as the elimination of the Advance Child Tax Credit and no Recovery Rebate Credit this year to claim pandemic-related stimulus payments, many taxpayers may find their refunds somewhat lower this year,” the IRS said in a press release on Jan. 23, the day that tax returns began for 2022.