IRS Expands Tax Network: More Crypto Assets Will Be Subject to 2023 Transaction Review

This article is brief:

• In 2023, the IRS requires all taxpayers to address mandatory digital assets on their tax returns.

• In 2023, the IRS expanded reporting requirements by expanding digital asset tax inquiries to a broader format.

• The U.S. Treasury Department delays enforcement of new Crypto Assets transaction reporting rules until clearer regulations are introduced.

Over the past few years, the Internal Revenue Service (IRS) has gradually revised the way it reports Crypto Assets on its tax returns. This reflects the changing perception of digital asset trading and ownership.

The changes from 2021 to 2023 show that the IRS is increasingly concerned about taxing digital money.

IRS Amends Crypto Assets Tax Reporting Rules

During the 2021 filing season, the IRS's approach to Crypto Assets was relatively new. The tax return for that year includes questions about the purchase or disposal of any Vitual Money. The IRS puts this question on Form 1040 (U.S. Individual Income Tax Return).

In particular, it asks whether the taxpayer has received, sold, exchanged, or otherwise disposed of any financial interest in Vitual Money. This marks one of the first major steps for the IRS to systematically identify and tax crypto transactions.

Heading into 2022, the IRS expanded and clarified its digital asset issues. The revised Form 1040 of 2022 asks whether a taxpayer has received, sold, exchanged, gifted, or otherwise disposed of a digital asset or an economic interest in a digital asset.

This change is significant as it provides greater clarity on the composition of reportable transactions. It also includes the aspect of gifting digital assets, which was not explicitly mentioned in the previous year's tax return.

For the 2023 tax season, the IRS has significantly expanded the scope of digital asset investigations. Enhanced questions now take on a broader form. This includes Forms 1040, 1040-SR, 1040-NR, 1041, 1065, 1120, and 1120S. This updated question covers a variety of digital asset transactions, such as receiving digital assets as rewards or payments and disposing of digital assets in various ways.

Updated 1040 IRS tax returns. Source: IRS

Other related changes

The U.S. Department of the Treasury and the IRS recently revised their Crypto Assets tax reporting methodology, specifically for transactions over $10,000. Initially, these transactions were subject to the same stringent reporting requirements as cash, creating a significant compliance burden for companies in the crypto industry.

Recognizing the unique challenges and characteristics of digital assets, the Ministry of Finance has chosen to relax these rules for the time being. As the government prepares to introduce formal regulations, the move marks a shift to a more adaptable approach to regulation.

The public can participate in the development of a future framework for digital asset trading before the new regulations are developed during the transition period. The Treasury Department plans to issue detailed rules and procedures and invite public feedback through written comments and public hearings.

This participatory process underscores the government's commitment to developing well-informed regulations that adapt to the complexity of the digital asset market, balancing the need for regulation with the dynamic nature of financial technology.