\n<\/p>\n
The Internal Revenue Service could have a potential head-scratcher of a question about your crypto investments and what\u2019s taxable, according to a major accountants\u2019 association.<\/p>\n
For two years, the IRS has been asking whether taxpayers have bought or sold cryptocurrency in the main \u201cForm 1040\u201d document that taxpayers submit for their federal income taxes. \u00a0The inquiry asks about other potential crypto-related tax events too. It\u2019s a \u201cyes\u201d or \u201cno\u201d question that taxpayers can\u2019t leave blank.<\/a><\/p>\n Last year, the Form 1040\u2019s asked<\/a>: \u201cDid you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency?\u201d (The wording differed slightly from the language appearing on the Form 1040 the year before that.<\/a> The question first appeared in tax year 2019, on the Schedule 1.)<\/p>\n The prominent placement is a nod to the IRS\u2019 increasingly sharp focus<\/a> to ensure cryptocurrency investors completely meet their tax obligations.<\/p>\n Fast forward to next year\u2019s tax returns: The IRS has proposed a draft question asking<\/a> for next year\u2019s Form 1040: \u201cAt 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)?\u201d<\/p>\n \n \u201c<\/span>For 2023, the IRS proposes asking: \u2018At 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)?\u2019\u201d<\/span>\n <\/p>\n<\/p><\/div><\/div>\n However, after the IRS unveiled that question\u2019s proposed wording ahead of 2023\u2019s 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.<\/a><\/p>\n As a general matter, capital gains taxes<\/a> will kick in on sales, exchanged coins, obtaining cryptocurrency through mining and other scenarios. But buying cryptocurrency and then just holding it has not<\/em> counted as a taxable event. When jobs pay with cryptocurrency, for instance, they are typically treated as wages subject to employment tax,<\/a> the IRS says.<\/p>\n In some ways, the newest version of the question is an improvement, said Annette Nellen, a tax professor at San Jose State University who chairs the AICPA\u2019s virtual currency task force. But including the phrase \u201c\u2019digital asset\u2019 is going to create new problems and new confusion,\u201d she said.<\/p>\n Apart from cryptocurrency such as Bitcoin The IRS has previously removed<\/a> V-Bucks and Robux from examples of virtual currency that can convert to real-world money. But creating, buying and selling NFTs<\/a> can have tax implications.<\/a><\/p>\n \n \u201c<\/span>After the IRS unveiled the proposed wording for a new question about digital assets ahead of 2023\u2019s tax season, the American Institute of CPAs recommended that the tax agency get out its pencils and erasers. \u201d<\/span>\n <\/p>\n<\/p><\/div><\/div>\n So what\u2019s the solution? The best approach would be a question asking if taxpayers during the year had \u201ca taxable event involving virtual currency\u201d and then point to instructions on what that means, AICPA said in its comment letter.<\/p>\n Those instructions, it added, should specify that an individual filer does not have to check \u201cyes\u201d if their child or dependent had their own cryptocurrency-related tax events generating income below the filing thresholds.<\/p>\n The back and forth on tax document wording may sound like dry semantics, but it underscores how much is still being figured out about cryptocurrency, taxes \u2014 and the public\u2019s continuing need to understand the ways the two interact.<\/p>\n The AICPA\u2019s comment letter wants the IRS to stick for now with the term \u201cvirtual currency\u201d instead of \u201cdigital asset.\u201d But even still, it notes, there are variations in how the IRS formally and informally defines \u201cvirtual currency\u201d in its guidance and instructions.<\/p>\n One reason investors need to understand the tax rules now is because it might help take some sting out of their 2022 losses. Investors can use capital losses to offset their gains. If loses exceed gains \u2014 and that might be the unfortunate case for some hard-hit cryptocurrency investors \u2014 a taxpayer can claim up to $3,000 in capital loses<\/a>. Any remaining loses can be carried forward to future tax years.<\/p>\n \n \u201c<\/span>Investors can use capital losses to offset their gains. If loses exceed gains \u2014 and that might be the unfortunate case for some hard-hit cryptocurrency investors \u2014 a taxpayer can claim up to $3,000 in capital loses.\u201d<\/span>\n <\/p>\n<\/p><\/div><\/div>\n Bitcoin Nearly two in ten U.S. adults said they owned cryptocurrency as of August, according to an ongoing Morning Consult poll.<\/a> The 18% in August is roughly even with the start of the year.<\/p>\n Matt Metras of MDM Financial Services in Rochester, N.Y., has a rosier view on the question the IRS is trying to pose. \u201cIt\u2019s not perfect, but it\u2019s better than it was last year,\u201d said Metras, who specializes in tax preparation for cryptocurrency holders. \u201cThe use of digital assets is more inclusive,\u201d he said.<\/p>\n Still, Metras doesn\u2019t know if there\u2019s ever going to be a crystal-clear, concise and perfectly phrased way the IRS can quiz about cryptocurrency holdings. The landscape keeps changing so fast, he noted.<\/p>\n The agency is thinking about \u201creadability and the information to be collected,\u201d when it puts new language on a tax form, said Michael Kramarz, director of Kaufman Rossin\u2019s tax services advisory group.<\/p>\n \u201cA taxpayer\u2019s response to an information request on a tax form is only as good as the question being asked. If a taxpayer cannot understand the language on a tax form, the IRS will not be able to collect the type and breadth of information it seeks,\u201d said Kramarz, a former IRS attorney.<\/p>\n The IRS will consider comment from tax professionals and the general public as it comes up with tax-document wording, Kramarz noted. They can submit comments here.<\/a><\/p>\n Typically, finalized tax forms start rolling out around November and December, Nellen said. The IRS declined to comment.<\/p>\n In Metras\u2019 view, \u201cThere\u2019s a lot of confusion out there in the general public about what\u2019s reportable and what isn\u2019t,\u201d with cryptocurrency. As a result, \u201cthere are people out there dabbling in it who are unsure of the question.\u201d<\/p>\n Now owners of crytpocurrency and tax professionals will have to wait on the IRS\u2019s final wording. \u201cHow it ends up is always a fun surprise,\u201d Metras said.<\/p>\n<\/p><\/div>\n
\n BTCUSD,
\n -1.36%<\/a>
\n or Ethereum
\n ETHE,
\n +0.60%<\/a>
\n ETHUSD,
\n -1.07%<\/a>,<\/span>
\n using a phrase like \u201cdigital asset\u201d raised questions if the IRS was also asking about nonfungible tokens (NFTs) and gaming currency like Fortnite\u2019s V-Bucks or the Robux offered on Roblox
\n RBLX,
\n -3.20%<\/a>,<\/span>
\n AICPA noted.<\/p>\n
\n BTCUSD,
\n -1.36%<\/a>
\n was trading just over $20,000 on Thursday, down nearly 57% from the start of the year. Ethereum
\n ETHUSD,
\n -1.07%<\/a>
\n is down more than 57% year to date.<\/p>\n