The US Internal Revenue Service (IRS) has issued draft guidance on the taxation of digital assets (2022 Tax Year Instructions for 1040 (and 1040-SR)). The draft guidance was published as part of the draft instructions for 2022 individual income tax returns, dated 17 October 2022.
Under the draft guidance, digital assets are "any digital representations of value that are recorded on a cryptographically secured distributed ledger or any similar technology". The guidance provides that digital assets include non-fungible tokens (NFTs) and virtual currencies, such as cryptocurrencies and stablecoins. In addition, the IRS will treat a particular asset as a digital asset for federal income tax purposes, if it has the characteristics of a digital asset.
The draft guidance, when finalized, would clarify that taxpayers must indicate "yes" to the question on digital assets of IRS Form 1040 or 1040-SR, if they, at any time in 2022:
- received (as a reward, award, or payment for property or services); or
- sold, exchanged, gifted, or otherwise disposed of a digital asset (or any financial interest in any digital asset).
Under the draft guidance, taxpayers have a financial interest in a digital asset if they:
- are owners of record of a digital asset;
- have an ownership stake in an account that holds one or more digital assets, including the rights and obligations to acquire a financial interest; or
- own a wallet that holds digital assets.
The draft guidance also lists some examples of transactions that would require taxpayers to check "yes" on the question on digital assets. However, the draft guidance also clarifies that the following transactions, alone, do not generally require taxpayers to check "yes":
- holding a digital asset in a wallet or account;
- transferring a digital asset from one wallet or account a taxpayer owns or controls to another wallet or account that the taxpayer owns or controls; and
- purchasing digital assets using US or other real currency, including through the use of electronic platforms (e.g. PayPal and Venmo).