IRS Broadens ‘Digital Assets’ Category to Include NFTs

IRS Broadens ‘Digital Assets’ Category to Include NFTs

The United States Internal Revenue Service (IRS) has replaced the previous category for “virtual currency” with broader new language on “Digital Assets,” including recognition of non-fungible tokens(NFTs), in an updated draft of its 2022 instructions for form 1040 filers.

When it’s time to file taxes in the US in 2022, the Treasury Department’s tax division will probably have introduced a category for crypto assets and NFTs that is more comprehensive.

The tax agency has released a proposed bill with a clearly defined Digital Assets section that explains how and if taxpayers will account for the usage of cryptocurrencies, stablecoins, and NFTs.

Crypto, NFTs Considered as Property in US

In the recent draft, “Digital Assets” are defined as “any digital representation of the value recorded on a cryptographically secured distributed ledger or any similar technology” (page 16). In the 2021 version of Form 1040, taxpayers were asked to say if they had received, sold, or traded “virtual currency.” This term will be changed in the 2022 version. The form requires taxpayers to fill out the Digital Assets section of their income tax returns, whether they dealt with crypto during the year or not.

Cryptocurrencies, including NFTs, are still considered property in the United States. Most taxable digital asset trades will be taxed as capital gains, just like stock trades. The IRS made this ruling public for the first time in 2014. Some cryptocurrency earnings, however, qualify as taxable income.

American taxpayers may need to answer “yes” to the question about digital assets on their Form 1040 or 1040-SR in a few possible scenarios. In 2022, this can mean getting a digital asset as a reward, award, or payment for goods or services, or selling, exchanging, gifting, or otherwise getting rid of that asset.

This would include situations where an individual was compensated in cryptocurrency for goods or services rendered or granted cryptocurrency as a prize or award. It also includes purchasing goods and services with digital assets, exchanging digital assets with others, and receiving new digital assets through mining.

In the Digital Assets primer, there is also information about when taxpayers don’t have to check “Yes” on their tax forms. If a person stores digital assets in a wallet or account, transfers digital assets from one wallet or account to another, or purchase digital assets with conventional currency via electronic platforms.

On the 2022 tax return, transactions with digital assets will be easy to classify as either income or capital gains.

If an individual sells any digital asset held as a capital asset during the year, they must calculate their capital gain or loss and file it under Schedule D of their tax return. People who got digital assets in exchange for services or who sell digital assets to consumers in a business transaction must report this as income in the right category.

On the Flipside

• The Internal Revenue Service has not yet guided whether or not token minting (including the creation of wrapped tokens, the public minting of NFTs, or the minting of interest-bearing assets) is a taxable event.

• It is currently unclear whether adding or removing LP tokens from DeFi liquidity pools qualify as crypto-crypto transactions.

• The taxes that apply to cryptocurrencies gained through staking are still unclear. Most people classify it as mining revenue. A continuing case, however, seeks to have stake incentives taxed only upon sale rather than at the time of earning.

Why You Should Care

The IRS requires US citizens to pay taxes on cryptocurrency and all other digital assets, so any sale of cryptocurrency will always result in a taxable event. Plans in recently proposed laws to increase the number of IRS agents and reporting requirements show that the government is getting stricter on crypto taxation.

Even more so now that the IRS is cracking down on digital assets, failing to report and pay tax on cryptocurrency transactions can lead to interest, fines, and even criminal charges.

Find out more on crypto taxation policies around the world:

Japan Considers Crypto Tax Reforms

Portuguese Government to Levy a 28% Tax on Crypto Capital Gains

See original on DailyCoin