 Internal revenue service, IRS tax news, IRS updates to question on digital assets, taxpayers should continue to report all digital asset income. Yeah, so in case you were wondering if the IRS wants some of your digital asset income, the answer is shockingly yes, yes they do. I mean, not only that, the IRS is like, not only do we want your digital income, but if we can't destroy it, we want control of it. Give us the power of the digital currency and we, the government, will construct one currency to rule them all. Instead of being self-governed using capitalistic markets, you'll have a woke-based market, money being distributed based on how bright your head glows in the dark. Based on the theory that if the best reindeer is the one with the brightest nose, then the most productive person must be the one with the brightest head, like those amazing ideas actually lighting up their hair. What? What's that, Phil? That hair thing's caused by hair dye? What? Huh. Well, that kind of blows up my whole theory. But whatever, we'll keep the policy anyways. What the hey, right? What's the harm that could happen? So anyways, it'll be like a beautiful and equitably fair society. At least if you take into account the fact that the term equitable is a made-up term, we can't actually define or measure, but it'll be great, at least for like five minutes, after which time it'll turn into an ugly hellscape. But so what? Like, like those five minutes, those five minutes will be utopia, man, and then we can continue progressing into like a pit of despair. I'm starting to think, given the government the power of the digital currency is a bad idea, I will give you the one ring. You owe it to me freely. I do not deny that my heart has greatly desired this. Anyways, onto the news. IR 2023-12, January 24, 2023, Washington. The Internal Revenue Service today reminded taxpayers that they must again answer a digital asset question and report all digital asset related income when they file their 2022 federal income tax return, as they did for fiscal year 2021. The term, quote, digital asset end quote, has replaced, quote, virtual currencies, a term used in previous years. The question which appears at the top of form 1040 individual income tax return, 1040 SRUS tax return for seniors and 1040 NRUS non-resident alien income tax return was revised this year to update terminology. In addition, the instructions for answering the question were expanded and classified to help taxpayers answer it correctly. All taxpayers must answer the question regardless of whether they engaged in any transactions involving digital assets. So obviously, the IRS is very concerned with the digital asset space because they don't have quite as much of a stranglehold over it in terms of being able to kind of double check people's income oftentimes within the area of the digital assets. So they're trying to do what they can to get that show cold in place. So this is what we've got so far. So for the 2022 tax year, it asks, quote, at any time during 2022, did you a receive as a reward, award or payment for property or services or be sell exchange gift or otherwise dispose of digital asset or a financial interest in a digital asset. So obviously, if you got paid in some way with a digital asset, the IRS is concerned on their end that it's some kind of income to you that they can't track on their side. And therefore, they're trying to find some way to track it on their side so that they can make sure that they get a piece of it. So what is a digital asset? A digital asset is a digital representation of value, which is recorded as a cryptographically secured distributed ledger. So once again, a digital asset is a digital representation of value. So if we defined oftentimes we think of money, and we're trying to think of these digital assets as another form kind of currency and part of the part of the idea of a currency, if it was to work would mean that it would have to maintain value and hopefully have some kind of consistency with the value to actually be used in the form of a currency as opposed to just kind of an investment tool. But in any case, it has value, which is recorded on a cryptographically secured distributed ledger. So common digital assets include convertible, virtual currency and cryptocurrency, stable coins, non fungible tokens, those are the NFTs. So if you're exchanging any of those kinds of items, that's where the IRS is having their concerns. So anyone must answer the question or everyone must answer the question. Everyone who files form 1040 form 1040 SR or form 1040 NR must check one box answering either yes or no to the digital digital asset question. So obviously the the irises I believe this is my interpretation of their thought process would be that they want everybody to kind of recognize the issue of the digital assets and then be able to say definitely whether or not they have conducted in a trade of digital assets or not so that if they have the audit related to them, then they can more easily make the argument and point to the thing and say yeah you can't just say that you didn't know because you answered this question right here so that it might give them some more strength in auditing and pursuing taxes with relation to the digital assets. That would be what I would think they're getting at with the rationale of the answered question here. So the question must be answered by all taxpayers not just those who engaged in a transaction involving digital assets in 2022 because again the point is that if I think they're concerned that if someone engaged in trading digital assets and they don't get any reporting for it such as a 1099 or a W2 or anything that they don't report it and then their argument is going to be well I didn't know because I didn't get any reporting document but if they make you check the box off then if you check the box off as yes then you're saying that you did have income and that makes it more likely that they might audit you if you don't report anything with relation to it and if you say no then they can say well now you lied on the tax return so it'd be harder to say I just didn't know and I didn't report. I think that's kind of the idea at this point. So when you check yes normally a taxpayer must check the yes box if they receive digital assets as payment for property or services provided transfer digital assets for free without receiving any consideration as a bona fide gift receive digital asset resulting from a wired or a reward or award received new digital asset resulting from mining staking and similar activities received digital assets resulting from a hard fork a branching of a cryptocurrencies blockchain that splits a single cryptocurrency into two disposed of digital assets in exchange for property or services disposed of digital assets in exchange or trade for another digital asset sold a digital asset or otherwise disposed of any other financial interest in a digital asset how to report digital digital asset income besides checking the yes box taxpayers must report all income related to their digital asset transactions so these are types of financial transactions where digital assets are involved either as kind of like an investment or as a tool for payment and then of course if you've got income with relation to that then you're going to have to report the income that's what the iris is after so that the iris can get a piece of the income so you have to now then say well how are you going to report the income it'll kind of depend you would think on the nature of the transaction that took place so for example an investor who held a digital asset as a capital asset and sold exchanged or transferred it during 2022 must use form 8 9 4 9 sales and other dispositions of capital assets to figure their capital gain or loss on the transaction and then report it on schedule D form 1040 capital gains and losses or form 709 united states gift and generation skipping transfer tax in the case of a gift so there's links to all that here but all that basically means is in my interpretation if you if you invested in digital assets kind of like you would in stocks and bonds and you waited for them just to increase and decrease you're trying to buy low sell high right so you bought the digital asset and then you sold it well then you would report it in a similar fashion as you would with the stocks and bonds and you'd have to figure out the gain usually on a schedule D usually that would be a capital gains type of situation that would roll over in a similar fashion as other kinds of investments or sales of stocks and bonds for example if an employee was paid with digital by the way though you with stocks and bonds because you're trading with a financial institution typically having a broker and an exchange and all that kind of stuff then you might you're probably going to get a 1099 related to it right but for here you may not because again the iris doesn't have the strangle hold on on the digital assets and so on and the same kind of fashion they don't have the same the whole point is to try to get the digital to the financial institutions out of the middle from the digital currencies or a lot of people think that if we can decentralize to some degree then then you won't have these middle people that have so much power and control just by managing you know the middle of the transaction if you can remove that you you would think in theory you would free up a lot of productivity and whatnot and make things a lot more streamlined of course that upsets the bureaucracy and the and the big banking systems and whatnot so so so there's a question if that's even possible theoretically and then a question if it's possible practically given the power structures you know currently in place but you know those are kind of the issues so obviously you might not get a 1099 and then you got to have rely on the self reporting an audit kind of system that we used to rely on before the iris kind of put into place this reporting requirements where everything that you get is reported in some way in the 1099 or W2 or so forth that is way more restrictive than it ever was or was planned to be before right it was basically an audit system okay move on so if an employee was paid with digital assets they must report the value of assets received as wages similarly if they worked as an independent contractor and were paid with digital assets they must report that income on schedule c form 1040 profit or loss from business sole proprietorship so now you have a situation where you're you have digital assets involved but it's not because you're buying the digital assets waiting till hoping they increase in value and then selling them but now you're getting paid in digital assets and if digital assets can maintain their value and not fluctuate all over the place which is another general concept with with regards to money when you define money you need something that can retain value and be somewhat consistent generally so that it can actually be used as a measure of exchange if it's bouncing all over the place that becomes difficult but if the if the market starts to stabilize on these because the whole environment starts to stabilize in with with some of these digital assets then in theory it could be used better as a as a as a means of exchange and you can get paid with it with the with the with the money but now of course you have the issue of you've gotten paid with digital assets and you've got to report that as income on the schedule c which gets a little bit tricky because now you've got paid in something that's denominator it's like getting paid out of foreign currency kind of you got paid in something other than dollars and you've got to use the measuring tool of dollars generally on the tax return to report your income so it gets a little bit a little bit tricky there but you get the general idea if you got paid you got paid if you got something in value got something in value if they gave you a car you still got income if they gave you a car because you did work and you have to figure out how much you earned report it as income generally is the same thing with whatever else you got paid with including cryptocurrency or whatever so schedule c is also used by anyone who sold exchange or transferred digital assets to customers in connection with a trader business when to check no normally taxpayers who merely owned digital assets during 2022 can check the no box as long as they did not engage in any transactions involving digital assets during the year they can also check the no box if their activities were limited to one or more of the following holding digital assets in a wallet or account so if you're just holding on to them in the wallet and you didn't exchange them that because that's when you're gonna have it's like holding on to stocks and bonds right when you exchange them that's when it triggers the possibility of realizing the gains transfer digital assets from one wallet or account they own or control to another wallet or account they own or control so in other words you didn't sell them you just are holding them in a different wallet that would be like kind of like moving from one financial institution to another and just taking your holdings and move it to the other without actually pulling them out and so then you shouldn't be realizing a gain or loss at that point therefore no tax implications you would think purchasing digital assets using us or other real currency including through electronic platforms such as PayPal and Venmo so PayPal and Venmo I believe the IRS is trying to to kind of kind of use them as the middle people in terms of the the system as well so in other words if you get paid by by PayPal for example they're trying to get PayPal to be the one on the hook to possibly issue a 1099 and that and that kind of stuff so if you're using you would think the PayPal to transfer money to somebody to somebody else that transfer may not be a business transaction it might be like a personal transaction so once again purchase digital assets using us or other real currency including through electronic platforms such as PayPal you would also think the purchasing of the currency isn't the thing that triggers a taxable event right but like buying stocks doesn't generally trigger the taxable event it's when you sell the stocks because that's when you're realizing possible gains that you're likely to have a taxable event possibly at that time so in any case you can that's just my interpretation I'm not an expert on this digital currency stuff although I think it's all an interesting thing I'm I'm curious to see how it all plays out here so but for more information you can see page 15 of the tax year 2022 1040 and 1040 SR instructions there's a link to that for a set of frequently asked questions FAQs and other details you can visit digital assets page on the irs.gov irs.gov irs.gov v for victory over tax tax stuff so there's a link to that here there'll be a link to this in the description