What investors need to know about the latest crypto tax reporting rules

The IRS is sharing extra particulars on the best way to report digital belongings for the 2022 tax submitting 12 months, in response to draft directions.

Since 2019, there’s been a sure or no “digital forex” query on tax returns, requiring filers to verify a field to reveal their taxable crypto exercise. For 2022, the company has modified the time period “digital forex” to “digital asset,” with extra steerage on when to verify “sure.”

Notably, “digital asset” now consists of non-fungible tokens, or NFTs, which grant possession to objects like artwork, and stablecoins, that are pegged to a real-world asset.

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“I believe that is a great change,” mentioned Matt Metras, an enrolled agent and cryptocurrency tax specialist at MDM Monetary Companies in Rochester, New York. “Individuals who commerce issues like NFTs wouldn’t consider that as a digital forex.”

The “broader language” could embrace new classes, similar to taxpayers receiving digital belongings from “play-to-earn video games,” which have turn out to be common over the previous 12 months, he mentioned.

“The IRS is all the time going to be behind the eight ball as a result of they only cannot sustain with how briskly the crypto area is altering,” Metras mentioned.

The draft directions say filers should verify “sure” in the event that they obtained digital belongings as a reward, award or cost for property or providers. And the company can also require “sure” if filers offered, exchanged or gifted digital belongings.

Regardless of the company’s makes an attempt to make clear steerage on digital asset reporting, questions stay for filers and tax professionals. 

For instance, filers aren’t required to submit a present tax return for transfers underneath $16,000 for 2022. Nonetheless, the query requires taxpayers to verify “sure” for presents which may be under that quantity, mentioned Andrew Gordon, tax legal professional, CPA and president of Gordon Legislation Group in Skokie, Illinois.

This will likely trigger IRS processing points with out corresponding reward exercise elsewhere on the return. Total, “there nonetheless appears to be an schooling hole for taxpayers,” he added.

The American Institute of CPAs has additionally expressed issues over the shortage of readability for taxpayers, referencing the “cryptographically secured distributed ledger” within the directions, which can confuse filers. 

“We advise IRS and Treasury hold the query centered on ‘digital forex’ till proposed and remaining laws are issued defining ‘digital belongings,'” mentioned Eileen Sherr, director of tax coverage and advocacy on the American Institute of CPAs. 

The group submitted feedback to the IRS concerning the query in late August, asking for revisions and clearer directions with examples earlier than finalizing the 2022 tax return.