IRS expands the “Digital Assets” category to include NFTs
The United States Internal Revenue Service (IRS) has replaced the previous “virtual currency” category with broader new language on “digital assets” in an updated draft of its 2022 form instructions, including recognition of non-fungible tokens (NFTs). 1040 filers.
When it comes time to file taxes in the US in 2022, the Treasury Department’s tax department will likely have introduced a broader category for crypto assets and NFTs.
The tax authority has published a draft law with a clearly defined section on digital assets, explaining how and if taxpayers will consider the use of cryptocurrencies, stablecoins and NFTs.
Crypto, NFTs are considered property in the US
The most recent draft defines “digital assets” as “any digital representation of value recorded in a cryptographically secured distributed ledger or similar technology” (page 16). In the 2021 version of Form 1040, taxpayers were asked to indicate whether they received, sold, or traded “virtual currency.” This term will be changed in the 2022 version. The form requires taxpayers to fill out the “digital assets” section of their income tax returns, regardless of whether or not they have dealt with crypto during the year.
Cryptocurrencies, including NFTs, are still considered property in the United States. Most taxable digital asset transactions are taxed as capital gains, just like stock transactions. The IRS first made this ruling public in 2014. However, some cryptocurrency earnings are considered taxable income.
American taxpayers may be required to answer “Yes” to the digital asset question on their Form 1040 or 1040-SR in some possible scenarios. In 2022, this may mean receiving a digital asset as a reward, award, or payment for goods or services, or selling, bartering, giving away, or otherwise getting rid of that asset.
This would include situations where an individual was compensated in cryptocurrency for goods or services provided, or cryptocurrency was granted as a prize or award. It also includes buying goods and services with digital assets, exchanging digital assets with others, and obtaining new digital assets through mining.
Also see the Introduction to Digital Assets for information on when taxpayers do not need to tick “yes” on their tax forms. When a person stores digital assets in a wallet or account, transfers digital assets from one wallet or account to another, or purchases digital assets using traditional currency through electronic platforms.
In the 2022 tax return, digital asset transactions are easily classified as income or capital gains.
If an individual sells an investment digital asset during the year, they must calculate their capital gain or loss and submit it on Schedule D of their tax return. Individuals who have received digital assets in exchange for services or who sell digital assets to consumers as part of a business transaction must report this as income in the correct category.
On the flip side
- The Internal Revenue Service has not yet determined whether or not token minting (including the creation of wrapped tokens, the public minting of NFTs, or the minting of interest-bearing assets) is a taxable event.
- It is currently unclear whether adding or removing LP tokens from DeFi liquidity pools will qualify as crypto-to-crypto transactions.
- The taxes that will apply to cryptocurrencies obtained through staking are still unclear. Most people classify it as mining revenue. However, an ongoing case aims to tax equity incentives only when sold and not when earned.
Why you should care
The IRS requires US residents to pay taxes on cryptocurrency and all other digital assets, so any sale of cryptocurrency always results in a taxable event. Plans in recently proposed legislation to increase the number of IRS agents and reporting requirements show the government is tightening crypto taxation.
Even more so, as the IRS takes action against digital assets, failure to report cryptocurrency transactions and pay taxes can result in interest, fines, and even criminal charges.
Learn more about crypto tax policies around the world:
Japan is considering crypto tax reforms
The Portuguese government imposes a 28% tax on crypto capital gains
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