There's a lot of talk about cryptocurrency investors and tax compliance, but the yes or no question can be a surprisingly important one. The IRS is asking everyone about cryptocurrency transactions. A variation of this seemingly innocuous question appears at the top of Forms 1040, Individual Income Tax Return; 1040-SR, US Tax Return for Senior Citizens; and 1040-NR, Income Tax Returns for Nonresident Aliens of the United States, revised for 2023 returns to update wording. The question has also been added to these forms: Forms 1041, U.S. Income Tax Returns for Estates and Trusts; 1065, Return of Partnership Income in the United States; 1120, US Corporate Income Tax Return; and 1120S, U.S. income tax returns for an S corporation.
The IRS asks this question with variations for corporations, partnerships, estates, and trusts:
- “At any time during 2023, did you: (a) receive (as a reward, prize or payment for property or services); or (b) sell, exchange or otherwise dispose of a Digital Asset (or a financial interest in a Digital Asset) )?” yes or no?
By digital assets, the IRS means “any digital representations of value that are recorded on a distributed ledger secured by cryptography or similar technology. For example, digital assets include non-fungible tokens (NFTs) and virtual currencies, such as cryptocurrencies and stablecoins.” .
You no They are supposed to leave it blank, and everyone filing Forms 1040, 1040-SR, 1040-NR, 1041, 1065, 1120, 1120, and 1120S must check one box to answer either “yes” or “no.” In addition to checking the box, you must report all revenue related to digital asset transactions. Therefore, an investor who owns a digital asset as a capital asset and sells, exchanges, or transfers it during 2023 must use Form 8949, Sales and Other Dispositions of Capital Assets, to determine his or her capital gain or loss from the transaction and then report it on Schedule D (Form 1040), Gains and capital losses. Taxpayers who make a gift of a digital asset may be required to file Form 709, US Gift (and Generation Skipping Transfer) Tax Return.
So does a yes or no question really matter? It doesn't ask for numbers or details, although if you sell some, that must be stated elsewhere in your tax return. Since the IRS classified cryptocurrencies as property a decade ago, any sale must result in a profit or loss. Maybe the IRS is just scanning who uses cryptocurrencies, can you guess? Not necessarily, and a simple yes or no answer may turn out to be important.
It sounds similar to the foreign account question listed on Schedule B of Form 1040. This question could result in significant penalties or even committing perjury for checking the wrong box. If you answer “no” and are then discovered to have engaged in cryptocurrency transactions during the year, the fact that you explicitly answered “no” to this new question (under penalties of perjury) could be used against you.
We learned this with foreign bank accounts. In this context, the Department of Justice's Tax Division successfully argued that simply failing to check a box regarding reporting foreign accounts was unacceptable. In itself Be baptized. Willful failure results in harsher penalties and an increased threat of criminal investigation. The IRS Criminal Investigation Division has met with tax authorities from other countries to share data and enforcement strategies to find potential cryptocurrency tax evasion.
This would suggest that the safe play is to check yes, right? But what if you don't know whether you can fairly say that it was you who made the transactions? What if you act for your company, not personally? Or less formally, what if you had some sort of “signing authority” over cryptocurrencies owned by your parents or other computer-agnostic relatives to help them manage their cryptocurrencies?
If you sell a parent's cryptocurrencies on their behalf, at their request and/or for their benefit, should you answer “yes” or “no” to the question? In either case, should you include an explanatory return statement explaining your relationship to the virtual currency? There are probably no perfect answers to these questions. The IRS says you have a financial interest in a digital asset if you are the owner of record of the digital asset, you have an ownership interest in an account containing one or more digital assets, including the rights and obligations to have a financial interest, or you own a wallet. Contains digital assets.
But it helps that the IRS also said that the following actions or transactions in 2023, alone, generally do not require you to check “yes”:
- Hold a digital asset in a wallet or account;
- Transfer a digital asset from a wallet or account that you own or control to another wallet or account that you own or control; or
- Purchase digital assets using US currency or other real currencies, including through the use of online platforms such as PayPalPYPL and Venmo.
The IRS states that questions should not be left unanswered, and the answer should be “yes” or “no.” There is more information at IRS.gov/VirtualCurrencyFAQs. It is clear that answering “no” if the truth is “yes” is a big mistake. Skipping boxes entirely may not be a bad thing, but it's not good either. If the truth is “yes,” say so, and remember to disclose and report your income, gains, losses, etc. Maybe that's the point of the question, as a salient reminder.
If this makes you realize that you forgot to report your cryptocurrency gains in years past, consider amending your tax returns to fix it. Don't wait for the IRS to find you, even if you don't get one of these 10,000 cryptocurrency warning letters from the IRS. Five years ago, the IRS sent letters to 10,000 cryptocurrency taxpayers, and even if it did no Get one of 10,000 IRS letters, You may want to dust off your previous tax returns and consider amending your taxes.
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