The authority changed the draft instructions for tax form 1040 in 2022 to include non-fungible tokens (NFTs) and stablecoins, replacing the term “virtual currency” with “digital assets.”
The IRS defined digital assets as “any digital representations of value that are recorded on a cryptographically secured distributed ledger or any similar technology” in the recently released draft of the individual income tax return. Non-fungible tokens (NFTs) and virtual currencies, such as cryptocurrencies and stablecoins, are examples of digital assets.”
According to the updated questionnaire, taxpayers must report any cryptocurrency acquisition, including those received “as a reward, award, or payment for property or services” or “sold, exchanged, gifted, or otherwise disposed of a digital asset (or any financial interest in any digital asset).”
The IRS announced plans to make public criminal tax-evasion cases involving cryptocurrency, opening a new front in the agency’s expanding investigation of the industry.
Though taxpayers are required to report any associated profits and losses from their crypto dealings, the IRS’s experience “has demonstrated significant tax compliance deficiencies relating to cryptocurrencies and other digital assets,” according to the petition.
The IRS believes that crypto transactions are not being properly reported on tax returns based on its recent experiences with cryptocurrencies. The authority claims that there is no third-party reporting to the IRS on such transactions, and previous summonses served on other cryptocurrency dealers revealed significant underreporting of such transactions.
Numerous allegations of tax officials cracking down and going after bitcoin merchants have recently surfaced. Additionally, the IRS sent letters to taxpayers who may not have disclosed their cryptocurrency-related income or paid the accompanying tax.
Since 2014, the tax agency has only issued the so-called “Notice 2014-21” as instruction before delivering cryptocurrency owners a letter warning of penalties if they do not pay tax on crypto transactions.
The IRS recently released more than 40 Q&As on bitcoin tax compliance as a further indication that it is intensifying its emphasis after initially being slow to keep up with the expanding business.
Fundamentally, the IRS continues to treat cryptocurrencies as property rather than money for income tax purposes, just as it did when its regulatory advice was released seven years ago. This means that the government will keep taxing cryptocurrency gains and losses at capital gains rates, just like it does with equities.