The Internal Revenue Service (IRS) reminds taxpayers that they must once again answer the digital asset question and report all digital asset-related income when filing their 2023 federal income tax returns, just as they did for their 2022 federal tax filings.
What Are Digital Assets?
Digital assets are digital representations of value recorded on cryptographically secured distributed ledgers or similar technologies. Common types include:
- Convertible virtual currencies (e.g., Bitcoin, Ethereum)
- Stablecoins (e.g., USDC, Tether)
- Non-fungible tokens (NFTs)
Who Must Answer the Digital Asset Question?
Every taxpayer filing the following forms must check "Yes" or "No":
- Individual Taxpayers: Form 1040, 1040-SR, 1040-NR
- Businesses/Entities: Form 1041 (estates/trusts), 1065 (partnerships), 1120 (corporations), 1120S (S corporations)
The question has been revised for 2023 to clarify wording but retains the same intent:
"At any time during 2023, did you: (a) receive digital assets as payment, reward, or income; or (b) sell, exchange, gift, or otherwise dispose of a digital asset?"
When to Check "Yes"
Taxpayers must check "Yes" if they engaged in any of the following:
- Received digital assets as payment for goods/services
- Earned digital assets through mining, staking, or rewards
- Experienced a hard fork resulting in new assets
- Sold, traded, or disposed of digital assets for capital gains/losses
- Used digital assets in business transactions (reported on Schedule C)
Example: An NFT artist receiving Ethereum for their work must report the income and check "Yes."
How to Report Income
- Capital Gains: File Form 8949 and Schedule D (Form 1040) for profits/losses from sales.
- Business Income: Report payments on Schedule C (e.g., freelancers paid in crypto).
- Wages: Employees paid in digital assets must report the fair market value as income.
When to Check "No"
Check "No" if activities were limited to:
- Holding digital assets in a wallet.
- Transferring assets between owned accounts.
- Purchasing digital assets with fiat currency.
Compliance and Penalties
Failure to report digital asset income may result in penalties or audits. The IRS uses blockchain analytics to identify discrepancies.
FAQs
Q1: Do I need to report if I only bought crypto but didn’t sell?
A1: No—check "No" if you merely held assets without transactions.
Q2: How is staking income taxed?
A2: Staking rewards are taxable as ordinary income at the fair market value when received.
Q3: Are peer-to-peer crypto trades reportable?
A3: Yes—exchanging one crypto for another triggers a taxable event.
👉 Learn more about crypto tax compliance
Key Takeaways
- Mandatory Reporting: Answer the digital asset question on applicable tax forms.
- Detailed Records: Maintain transaction logs for audits.
- Professional Advice: Consult a tax expert for complex cases (e.g., DeFi transactions).
For further guidance, visit the IRS Digital Assets Hub.
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