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IRS Updates the Crypto Question on 2022 Draft Form 1040

Shehan Chandrasekera, CPA

Sep 17, 2022 • 3 MIN READ

The IRS continues to refine and update their question regarding cryptocurrencies. The draft Form 1040 for 2022, released September 1, 2022, shows the newest version of the cryptocurrency question. Below you can see the evolution of the question between 2022 and 2021.

2022 IRS Crypto Question
2021 IRS Crypto Question

In 2022 the IRS seems to be taking a more direct approach than in 2021 by further defining the terms used in the question.

“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)?”

The goal of the question is clear. The IRS is trying to see who has taxable transactions. They revised the receive portion of the question to outline the possible receipt items (rewards, awards, payment). They added “gift” to the face of the return as one of the sent items requiring a yes answer. The other significant change to the question was substituting “virtual currency” with “digital asset.” This change will bring NFTs into the scope of the question.

When you can answer “No” to the digital assets question

The IRS has not released draft instructions for the 2022 form yet, but based on the prior year’s instructions, a taxpayer can check “No” for the crypto question if you:

  • Only bought digital assets using fiat.
  • Only Held cryptocurrency in wallets purchased in previous years (Hodling).
  • Transferred digital assets between your own wallets during 2022.

When you must answer “Yes” to the digital assets question

You will still have to check “Yes” if you have come across the following situations in 2022:

  • Received crypto (includes airdrops or hard forks)
  • Sold crypto for fiat (ex:- cashing out bitcoin on Coinbase)
  • Traded crypto for another crypto (ex:- spending Bitcoin to buy Ethereum)
  • Used crypto to purchase goods or services (ex:- using a crypto debit/credit card to buy a cup of coffee)
  • Gifted crypto to a person or organization.

Selling crypto into fiat, trading crypto for another crypto, and using crypto to buy goods and services are taxable events and subject to income tax. You are responsible for calculating the cost basis and resulting tax liabilities.

Crypto taxes are still ambiguous

Even with the existing instructions provided by the IRS, the guidance is still far from comprehensive. For example, we still don’t know whether a taxpayer who owns Bitcoin through a pass-through entity needs to check “Yes” for the question. The “financial interest” portion of the question is still subject to interpretation.

The IRS has not released updated 2022 instructions, and the 2022 Form 1040 is still a draft. However, this question will most likely end up on the final Form 1040 in its current state.

If you have any questions or comments about crypto tax and IRS forms, let us know on Twitter @CoinTracker.

CoinTracker integrates with 300+ cryptocurrency exchanges, 8,000+ blockchains, and makes bitcoin tax calculations and portfolio tracking simple.

Disclaimer: This post is informational only and is not intended as tax advice. For tax advice, please consult a tax professional.


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