US Taxpayers will be required to declare their Crypto handling from now on. The Internal Revenue Service (IRS) has published an enhanced Form 1040 that individual taxpayers use to file their tax returns.
American taxpayers must file their taxes by specified dates in April. Failure to file taxes attracts a penalty of 5% of the unpaid or part of the tax due for the month. After five months of noncompliance, the penalty will max out, and the taxpayer will remain with a definite arrear.
The Structure of the Question
The digital asset declaration question on form 1040 reads as follows;
“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)?”
The section is a refinement of the 2021 query, which read as follows:
“At any time during 2021, did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency?”
The IRS is opting to refer to tokens as digital assets instead of virtual assets. It should be noted that digital assets comprise Non-Fungible Tokens (NFTs), Cryptocurrencies, Stablecoins, Central Bank Digital Currencies, and other native Blockchain tokens.
The Box Should Not Be Left Unchecked
In 2021, the IRS issued a guideline mandating all taxpayers to use form 1040 to ensure that the question is answered in either ‘Yes’ or ‘No.’ The agency advised taxpayers as follows:
Select ‘No’ for hodling Crypto
Select ‘Yes’ for transacting in Crypto (short selling and long selling)
Select ‘No’ for only owning Crypto and not transacting using the digital assets
Select ‘No’ for transferring Crypto between wallets such as Paypal and Venmo to a private wallet.
Hence, the IRS requires only the active investors in the Crypto market to declare their activity as a source of income.
Crypto is Now in The Mainstream Financial System
The inclusion of digital assets in the IRS form 1040 proves that digital assets are now mainstream financial instruments. The government is seemingly heading to tax digital asset gains. The USA is already mooting a comprehensive plan to streamline the Crypto industry. There is a bipartisan Crypto bill that is being deliberated in Congress. Additionally, the role of the Securities and Exchange Commission (SEC) and the Commodities and Futures Trading Commission (CFTC) is redefined.
The USA is the first major economy to collect the use of digital assets data at a national level. The information could pave the way for regulation deemed long overdue by many experts.
In the meantime, the fast-changing world of digital assets means that the IRS is likely to amend the query in the coming years.