IRS expands tax net: more cryptocurrencies to come under 2023 trading scrutiny

This article briefly:

-In 2023, the IRS requires all taxpayers to address mandatory digital asset questions on their tax returns.

-In 2023, the IRS expands the digital asset tax inquiry to a broader form, expanding the reporting requirements.

-The U.S. Treasury Department has delayed implementation of the new cryptocurrency transaction reporting rules until clearer regulations are in place.

Over the past few years, the U.S. Internal Revenue Service (IRS) has incrementally revised its approach to cryptocurrency reporting on tax returns. This reflects changing perceptions of digital asset trading and ownership.

The changes from 2021 to 2023 suggest that the IRS is increasingly concerned about taxing digital currencies.

IRS Changes Cryptocurrency Tax Reporting Rules

The U.S. Internal Revenue Service’s (IRS) treatment of cryptocurrencies is relatively new for the 2021 tax filing season. Tax forms for that year include questions about the purchase or disposition of any virtual currency.The IRS puts this question on Form 1040 (U.S. Individual Income Tax Return).Antminer Miner

It specifically asks whether the taxpayer has received, sold, exchanged, or otherwise disposed of any financial benefit from the virtual currency. This marks one of the first major steps for the IRS to systematically identify and tax crypto transactions.

Moving into 2022, the IRS expanded and clarified its digital asset question. the revised 2022 Form 1040 question asks whether the taxpayer has received, sold, exchanged, gifted, or otherwise disposed of a digital asset or an economic interest in a digital asset.

This revision is significant because it provides greater clarity as to what constitutes a reportable transaction. It also includes the aspect of gifting digital assets, which was not explicitly mentioned in the prior year’s tax form.

For the 2023 tax season, the IRS significantly expanded the scope of the digital asset investigation. Enhanced questions are now available in a wider range of forms. This includes Forms 1040, 1040-SR, 1040-NR, 1041, 1065, 1120, and 1120S. This updated question covers a variety of digital asset transactions, such as receiving digital assets as rewards or payments and disposing of digital assets in various ways.

Updated 1040 IRS Tax Return. Source: IRS

Other Related Changes

The U.S. Department of the Treasury and the IRS recently modified the cryptocurrency tax reporting methodology, specifically for transactions over $10,000. Initially, these transactions were subject to the same stringent reporting requirements as cash, which placed a significant compliance burden on companies in the crypto industry.

Recognizing the unique challenges and characteristics of digital assets, the Ministry of Finance chose to relax these rules for the time being. This move marks a shift to a more adaptive approach to regulation as the government prepares to introduce formal regulations.

The public will be able to participate in shaping the future framework for digital asset trading until new regulations are put in place during the transition period. The Treasury plans to publish detailed rules and procedures and invite public feedback through written comments and public hearings.Whatsminer Miner

This participatory process underscores the government’s commitment to developing well-informed regulations that are responsive to the complexity of the digital asset market and balance the need for regulation with the dynamic nature of financial technology.