Tracking Digital Assets on Your 2022 Form 1040

The IRS is gearing up to get their share of digital profits. Not only are they requiring brokerage companies to report sales of digital assets, but now their is a new check box on the upcoming tax forms. When you do your taxes for 2022 next spring, you must check “yes” or “no” to the digital asset question on the front of Form 1040.

Digital assets are digital representations of value that are recorded on a cryptographically secured distributed ledger or similar technology. Examples of digital assets are:

  • Virtual currencies such as cryptocurrencies and stablecoins
  • Non-fungible tokens (NFTs)

If an asset has the characteristics of a digital asset it will be treated as one for federal income tax purposes. See IRS’s virtual currency FAQs for more information and detailed definitions.

Answering the digital asset checkbox question

The digital asset checkbox on the 2022 Form 1040 states: “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)?” As explained above, taxpayers cannot leave the question unanswered.

For example, taxpayers should check “yes” if they:

  • Received digital assets:
    • as payment for property or services provided
    • as a result of a reward or award
    • as a result of mining, staking, and similar activities
    • as a result of a hard fork
  • Disposed of digital assets:
    • in exchange for property or services
    • in exchange or trade for another digital asset
  • Sold a digital asset
  • Transferred digital assets for free (without consideration) as a bona fide gift
  • Otherwise disposed of any financial interest in a digital asset

A taxpayer has a financial interest in a digital asset if the taxpayer:

  • Is the owner of record of a digital asset, or
  • Has an ownership stake in an account that holds one or more digital assets, including the rights and obligations to acquire a financial interest, or
  • Owns a wallet that holds digital assets

Taxpayers can generally check “no” if they:

  • Simply hold a digital asset in a wallet
  • Transfer a digital asset from one wallet or account they own or control to another wallet or account they own or control
  • Purchase digital assets using U.S. or other real currency, including through electronic platforms such as PayPal or Venmo

Reporting digital assets transactions

Disposition of a capital asset.

If a taxpayer disposes of a digital asset held as a capital asset through a sale, exchange, gift, or transfer, the taxpayer should use Form 8949 to calculate capital gain or loss and report the gain on Schedule D. 

Disposition of an asset held for sale.

If a taxpayer disposes of a digital asset held for sale to customers in a trade or business, the taxpayer should report the income as the taxpayer would report other income of the same type. For example, a sole proprietor would report the sale of a digital asset held in inventory on Schedule C as part of gross receipts and cost of goods sold.

Receipt as compensation for services.

In the same way, the taxpayers should report the income as the taxpayer would report other income of the same type. If the taxpayer received digital assets as W-2 wages, the taxpayer would report the amount on line 1a of Form 1040.