What taxpayers need to know about digital asset reporting and tax requirements

Taxpayers filing 2023 tax returns must check a box indicating whether they received digital assets as a reward, award or payment for property or services or disposed of any digital asset that was held as a capital asset through a sale, exchange or transfer.

A digital asset is a digital representation of value that is recorded on a cryptographically secured, distributed ledger or any similar technology. Common digital assets include virtual currency and cryptocurrency, stablecoins and non-fungible tokens.

Examples of digital assets transactions include:

• Sale of digital assets.
• Receipt of digital assets as payment for goods or services.
• Receipt of new digital assets because of mining and staking activities.
• Receipt of new digital assets because of a hard fork.
• Exchange of digital assets for property, goods or services.
• Exchange or trade of digital assets for another digital asset(s).
• Any other disposition of a financial interest in digital assets.

Reporting digital assets transactions

Taxpayers must report all income related to their digital asset transactions.

• Use Form 8949, Sales and other Dispositions of Capital Assets, to calculate a capital gain or loss and report it on Schedule D (Form 1040), Capital Gains and Losses.
• If the transaction was a gift, file Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return.
• If individuals received any digital assets as compensation for services or disposed of any digital assets they held for sale to customers in a trade or business, they must report the income as they would report other income of the same type. For example, they would report W-2 wages on Form 1040 or 1040-SR, line 1a, or inventory or services on Schedule C.
• If an employee was paid with digital assets, they must report the value of assets received as wages. Similarly, if they worked as an independent contractor and were paid with digital assets, they must report that income on Schedule C (Form 1040), Profit or Loss from Business (Sole Proprietorship). Schedule C is also used by anyone who sold, exchanged or transferred digital assets to customers in connection with a trade or business.