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IRS Expands Form 1040 Reporting of Digital Assets for Tax Year 2022

By Anthony P. Daddino on August 5, 2022
The IRS has seemingly endless curiosity when it comes to cryptocurrency and other digital assets. For tax year 2022, the IRS seeks to expand Form 1040 reporting to require disclosure of all inward and outward transfers of digital assets – whether tradeable or not, whether taxable or not.

The IRS first added a question about cryptocurrency to the 2019 Form 1040. The question has been tweaked slightly, with the 2021 Form 1040 inquiring: “At any time during 2021, did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency?” While the reader may consider this question broad (or perhaps, like the author, an example of IRS over-reach), the IRS believes it to be too narrow. On July 27, 2022, the IRS released a draft version of the 2022 Form 1040 that significantly expands the scope of the question, which now reads: “At any time during 2022, did you (a) receive (as reward, award, or compensation); or (b) sell, exchange, gift, or otherwise dispose of a digital asset (or financial interest in a digital asset)?” A copy of the draft 2022 Form 1040 is linked here.

Notice how the IRS changed the nomenclature from virtual currency to digital assets, presumptively to include non-fungible tokens and other evolutions in the digital asset universe. Also, notice the IRS’ additional specificity, providing examples of how a taxpayer might receive a digital asset and expressly identifying “gifts” as subject to the reporting requirement. Further noteworthy, the IRS has moved away from the reporting of mere financial activity, mandating disclosure of all inflows and outflows of digital assets regardless of whether the taxpayer has a financial interest. This broadening of the Form 1040 reporting requirement comes on the heels of Congress’ expansion of reporting requirements for digital assets last year. Enacted in November, the Infrastructure Investment and Jobs Act made digital assets subject to the same Form 1099 requirements as traditional securities. Unlike the 2022 Form 1040, however, the Form 1099 requirements take effect January 1, 2024.

There is always a few bad apples in a bunch. But sadly, the IRS continues to myopically focus on the bad applies, treating cryptocurrency and digital assets as vehicles for abuse and avoidance. The IRS has lost sight of the need to promulgate commonsense guidance to assist taxpayers grappling with novel tax issues. Its heavy-handed enforcement has alienated compliance-minded taxpayers who are simply seeking fair tax treatment of their cryptocurrency transactions.

At the risk of mixing metaphors, it is time for this pendulum to swing in the opposite direction.

If you have any questions about this blog post, cryptocurrency, or any other tax-related topic, feel free to contact me at (214) 749-2464 or adaddino@meadowscollier.com.