Proposed 1040 Question on Digital Assets Will Trip Up Taxpayers, CPAs Say
As if the crypto community wasn’t nervous enough about vague and opaque regulations and rules, get ready for more since the tax stakes are going up again for 2022 income taxes. It’s almost like the IRS wants to discourage people from even using cryptocurrency.
A draft of the 2022 IRS Form 1040 asks: “At any time during 2022, did you: (a) receive (as a reward, award, or compensation); or (b) sell, exchange, gift, or otherwise dispose of a digital asset (or a financial interest in a digital asset)?”
This, the American Institutes of CPAs says, needs to be fixed because it’s too confusing for taxpayers.
The Internal Revenue Service could have a potential head-scratcher of a question about your crypto investments and what’s taxable, according to a major accountants’ association.
For two years, the IRS has been asking whether taxpayers have bought or sold cryptocurrency in the main “Form 1040” document that taxpayers submit for their federal income taxes. The inquiry asks about other potential crypto-related tax events too. It’s a “yes” or “no” question that taxpayers can’t leave blank.
Last year, the Form 1040’s asked: “Did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency?” (The wording differed slightly from the language appearing on the Form 1040 the year before that. The question first appeared in tax year 2019, on the Schedule 1.)
The prominent placement is a nod to the IRS’ increasingly sharp focus to ensure cryptocurrency investors completely meet their tax obligations.
Fast forward to next year’s tax returns: The IRS has proposed a draft question asking for next year’s Form 1040: “At any time during 2022, did you: (a) receive (as a reward, award, or compensation); or (b) sell, exchange, gift, or otherwise dispose of a digital asset (or a financial interest in a digital asset)?”
However, after the IRS unveiled that question’s proposed wording ahead of 2023’s tax season, the American Institute of CPAs recommended the tax agency get out its pencils and erasers. The tax agency needs to clarify the question to avoid taxpayer confusion, the organization said in its comment letter.
As a general matter, capital gains taxes will kick in on sales, exchanged coins, obtaining cryptocurrency through mining and other scenarios. But buying cryptocurrency and then just holding it has not counted as a taxable event. When jobs pay with cryptocurrency, for instance, they are typically treated as wages subject to employment tax, the IRS says.