IRS Changes The Crypto Question For 2022 Tax Returns

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A couple of years ago IRS decided to ask individuals filing their tax returns about their involvement in crypto. They have added a question in 1040 form, and it would read as following:

At any time during 2021, did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency?

The IRS started asking this question in 2020 and continued to ask the same question in 2021. The answer to the question doesn't necessarily directly change anything about the tax return. Even without this question, it has always been individual's responsibility to declare all income, crypto or otherwise. However, it did emphasize that IRS was serious about collecting taxes on income from crypto.

Taxes on crypto still remain confusing to this day. Not only because government agencies are too slow to clarify things, but also because crypto world is confusing as well. Not all assets have the same characteristics, not all blockchain networks function the same, and there are many types of activities in crypto that may be debatable wether they are taxable events.

It is tax season again in the US and as we prepare to file tax forms for 2022, the IRS has a surprise crypto question once again. But this time they have completely changed the question. The new question on 1040 reads as following:

Digital Assets: 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)? (See instructions.)

The biggest change we can see right away is the change in wording of the crypto assets. In the previous forms crypto assets were referred to virtual currency. Now they are calling them digital assets. Perhaps that is a better wording that would include all crypto assets, because not all assets can be used as currencies. For example NFTs.

This time IRS is a little bit more specific with their questions and they try to define what can actions can be receiving digital assets and what actions can be disposing of digital assets or financial interest in digital assets. The IRS takes one more step further with more detailed instructions about digital assets question which also defines what digital assets are.

Digital assets are any digital representations of value that are recorded on a cryptographically secured distributed ledger or any similar technology. For example, digital assets include non-fungible tokens (NFTs) and virtual currencies, such as cryptocurrencies and stablecoins. If a particular asset has the characteristics of a digital asset, it will be treated as a digital asset for federal income tax purposes.
source

The instructions also provide useful examples on situations when one should answer 'Yes' to the digital assets question. According to the instructions if any of the following actions happened in 2022 then the answer would be 'Yes':

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

They also give examples of situations where some actions don't require to check 'Yes'.

  • Holding a digital asset in a wallet or account;
  • Transferring a digital asset from one wallet or account you own or control to another wallet or account that you own or control; or
  • Purchasing digital assets using U.S. or other real currency, including through the use of electronic platforms such as PayPal and Venmo.

This question must not be left unanswered. Filers must check 'Yes' or 'No' depending on their situation. Make sure to contact your tax specialist to figuring out the answer. Every situation is unique, and there is no one answer for all. Crypto taxes remain to be confusing, despite the latest efforts by IRS to clarify.

It does seem like a win for crypto blockchain technologies and networks overall. Just by looking at the examples IRS tax form instructions, we can see they have been observing various situations when crypto assets are being used. The one at the top of the list seems to be receiving crypto as payment for property or services. That means more adoption and how some people are choosing crypto payments. At the same time, IRS manages to make a distinction between cryptocurrencies and fiat by calling fiat as "real currency" towards the end of instructions. While I understand what they meant with that, it did sound funny. It is debatable which currencies are more real, fiat or crypto.

Make sure to read the instructions regarding how to report digital asset transactions when filing your taxes for 2022. Let me know your thoughts in the comments.

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A helpful reminder and clarification. I have to wonder if tax professionals are keeping up with the new world of digital assets. And if there is a list of tax pros who are crypto fluent.

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The IRS is gonna do everything it can to make sure the residents of the US that are below a certain income range are forced to stay there. It is infuriating, to say the least.

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I think IRS wants to know your crypto holdings. But it shouldn't be treated same as fiat money. It can swing 20% in a day, so it's difficult to predict !

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Imagine someone not clicking the claim button on blog rewards for an entire year so they could say they didn't receive crypto that year. Judging by the increase of complexity and legal-speak associated with the change I assume there are going to be some very interesting loopholes that people come up with.

The most annoying thing about all of this is that it massively incentivizes deflationary networks with token caps and punishes high inflation tokens with yield even though there is very little justification for doing so.

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I agree. Great observation regarding incentives/disincentives for deflationary vs inflationary networks.

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Just do 100% powered up, then you have no taxable events until you power down. At least in terms of blog rewards.

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Right right I've actually mentioned this before but it skipped my mind.
VESTS being non-tradeable can be pretty useful in this context.

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Interesting, sounds like they hardly know anything and learning as they work. The sad part is they will always focus on big issues like payment on property. When the crypto investor is focusing on small steps. Making there focus amiss which in turn could stiffen regulations for the space with hopes of them getting the most from the tax payer

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(Edited)

At least we can say this is where we are at least they are willing to take taxation from the cryptomarket, hopefully the SEC can get off our backs while the IRS is at it.

Eventually, people will still exploit the system

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The Federal Government doesn't want you to make a single penny unless they get half of it. Smh.
"Screw your retirement." - IRS, probably.

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I am not surprised to see them change the wording to catch more people. It just makes me wonder how things will be calculated in the future and how they will tax us in the future once the regulations are put in.

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"real currency"

 

Seriously?

That doesn't even make sense if they've added crypto to the official documents.

It's like... we know crypto is growing and we want a part of it. But we're also going to try and maintain general opinion that it isn't safe or real because we can't really control it.

Sneaky of them. But that's predictable :/

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Thank you for this update @geekgirl. Yes, paying taxes on our "digital assets" is an enormous challenge. At least for those, like me (and many others), who spend a fair amount of time in these "virtual worlds" attempting to create income streams ... Anyone who thinks otherwise is very likely consciously choosing to avoid the topic. Hoping somehow that is possible ...

Future changes to this form?

"List all the public addresses linked to the digital assets you own."

Then ... We'll find out ...

What do you think? Is that next, in the uhhh ... "progression" of the language of the instructions of the IRS?

P.S. Still "up to my eyeballs" working on my "tar baby" project. What's that? Building my own database to take care of all the intricate accounting details needed to pay my own taxes ...

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All I know is I hate the tax men. 🤣

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The government is just a mafia writ large, and the tax man is just a formal extortionist.

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In my mind, I distinguish between lawful and excessive.

!PIZZA

!CTP

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(Edited)

What does "lawful" mean, and can legality transform injustice into justice? How can a non-zero level of extortion ever be just? Who decides what is excessive?

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I understand that the word "law" is a heavy word and its meaning varies depending on someone's worldview or set of presuppositions one perceives the world. I am speaking of law from the Judeo-Christian point of view.

As to the second part of your question, I agree with you that there is a difference between law and justice. Unfortunately, most laws are unjust and that's why human laws are made to make plunder legal thereby instead of serving justice, they become tools to make injustice institutionalized.

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You might also want to distinguish between "lawfully excessive" and "excessively lawful". 😆😅

!LOLZ

!CTP

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Oh! That requires a great exegete to identify the difference between the two. 🤣

!LOLZ

!PIZZA

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If you think exegesis would cost you a lot of time and effort to determine the difference between the two phrases, then maybe you should do eisegesis first. 🤣

!LOLZ

!PIZZA

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Oh my! That's more expensive. It might cost you and others something even beyond time and money. 😄

!LOLZ

!PIZZA

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Laughs don't give them your coinage 😂 at all costs don't do it.

Deny deny deny!!

It's an confusing space though... Over here where I am they are trying their best to implement tax on cryptos... But they are failing massively

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I am certainly not looking forward to tax season. My sympathies are with CPAs right now having to deal with this garbled nonsense.

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I filed my taxes today, I hope all goes fine but in Austria it is slightly different. I don't have to declare any cryptonas long as I hold it as crypto. Changing crypto to crypto is not a taxable event. This makes it easy to lock in profits by buying stablecoins like HBD.
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I wouldn't call this a win. Crypto exists to subvert the central banks and government control systems, not to comply with their extortion schemes.

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I would say crypto is a great asset class to be invested in however to make the most of your investment it is better to be aware of the rules and plan your sales in order to mange the taxes.
Also be in the loop for any tax law updates as the governments and the law makers are only beginning to understand crypto's blockchas in, nfts and other avenues of investment in this space.
With that perspective in mind I would say your post is in the sweet spot of providing knowledge and update to anyone who falls under the jurisdiction of the IRS

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why does the world (at least the top/rich ppl) hate crypto so??

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Crypto is good but at the same time following taxation is much needed to follow. I hope we have better taxation for crypto.
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In India tomorrow the budget will be out and even I am looking forward to see what tax rules will be revealed.
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The same is the case here in Pakistan, whenever a person develops by working hard or expands his business, the government imposes a heavy tax on him, then that person leaves this country under compulsion. As people are now understanding crypto and reading about it and investing in it, the government is also taxing it. Governments just want the government coffers to be full. The biggest disadvantage of high taxation is that people leave the industry because they have to pay so much tax that they can't even make a profit.

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Sign, Pay unto Ceasar that which is Ceasars, or else.

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All Centralized Financial institutions won't backed down till they regulate crypto, control all our holdings and tax the hell out of us. Little by little we'll be asked to declare both assets that are staked and unstaked. Who knows, very soon, they may require taxes or a percentage on assets that give interests. For instance, in HBD's 20% interest, they may require 1%.

I honestly hope this doesn't happen some day.

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Muchas por las explicación y el contenido, no manejo mucho el tema pero es bueno aprender de todo en cuanto a esto se refiere. No podemos quedarnos atrás o a la sombra de todo, gracias

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It's very interesting how they changed the question from that of the previous years. Seems like they did their research hehe! I imagine it's going to be challenging for people to do their tax returns this time.

We are yet to have crypto taxation here in our country and tax forms have not been updated so I'm now wondering how our government will go about it. Most likely, people won't declare their crypto assets especially if they are just HODLing :)

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For us, in India, it is a direct tax of 30% flat for profit as well as 1% TDS on all trades.

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Hi @geekgirl
Reading this post makes me think of two perspectives that can be seen as the two sides of the coin.
On one side the IRS is trying to catch up with a new tech which can be quite overwhelming for many and on the other hand looking at the set of questions the devils advocate whispers into my ears that there are so many ways a person can avoid crypto taxes some via legit tax planning and others via not so legit ... lets say workarounds.
The coming years are going to be very interesting I must say
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