How IRS Expanded 1040 Crypto Tax Question for 2022

How IRS Expanded 1040 Crypto Tax Question  

In recent years, the Internal Revenue Service has significantly increased enforcement of cryptocurrency related transactions. This includes sending taxpayers notices of potential non-compliance, developing more aggressive enforcement protocols, issuing John Doe Summons to crypto companies – and proposing regulations designed to promote transparency. Each year, the IRS develops and publishes draft versions of different forms, including Form 1040 — and it appears the IRS has yet again updated the question(s) referring to the reporting and disclosure of cryptocurrency and virtual currency-related transactions. While the question is still on the first page, the verbiage is more complex and detailed than it was in prior years. Let’s take a look at how IRS Expanded the Form 1040 Crypto Tax Question for 2022.

2022 Crypto Tax Question Form 1040 (Draft)

• • • 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)? (See instructions.)…

2021 Crypto Tax Question Form 1040

• • • At any time during 2021, did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency (Yes or No)?

What’s the Key Difference for 2022 Crypto Taxes?

The key distinction between the 2022 and 2021 virtual currency question is that the newer version expands upon the different types of potential transactions that the IRS wants Taxpayers to consider when identifying what type of potential crypto transaction they participated in.

For example, the 2022 version breaks down the question into two parts:

• • • Part (a) refers to receiving crypto, whether it is by a reward, award or compensation (such as wages).

    • Part (b) meanwhle is designed to ensnare nearly any relinquishment of the crypto assets, albeit by selling it (capital gain), exchanging it (various potential tax implication depending on the nature of the transaction) or gifting it (which could result in 709 filing).

Taxpayers should be careful when responding to IRS questions about crypto, and if unsure, may want to consult with a Board-Certified Tax Law Specialist to get an understanding of the different options.

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