IRS Issues Update on “Digital Asset” Reporting Requirements for 2023

The Internal Revenue Service (IRS) recently issued an update regarding taxpayers’ digital asset reporting requirements for 2023. As the IRS explains, “taxpayers . . . must again answer a digital asset question and report all digital asset-related income when they file their 2022 federal income tax return, as they did for fiscal year 2021. The term ‘digital assets’ has replaced ‘virtual currencies,’ a term used in previous years.”

Answering the IRS’ Digital Asset Question in 2023

The IRS added the digital asset question to Forms 1040, 1040-SR and 1040-NR in an effort to remind taxpayers of their obligation to report income from all sources. While the impetus for the question was what the IRS determined to be widespread underreporting of cryptocurrency-related income, the IRS has now expanded its focus to include income from other sources—hence the change from “virtual currencies” to “digital assets.” The IRS currently defines digital assets to include:

• Convertible virtual currency and cryptocurrency
• Stablecoins
• Non-fungible tokens (NFTs)

Taking this definition into account, when preparing their tax returns in 2023, all taxpayers must accurately answer the question: "At any time during 2022, did you: (a) receive (as a reward, award or payment for property or services); or (b) sell, exchange, gift or otherwise dispose of a digital asset (or a financial interest in a digital asset)?" If a taxpayer’s answer is “Yes,” then the taxpayer must disclose the relevant transactions and/or assets using the appropriate form or forms.

The Consequences of Failing to Disclose Digital Assets and Related Income to the IRS

For U.S. taxpayers, accurately and timely disclosing digital assets and related income to the IRS is taking on heightened importance. The IRS is now focused on enforcing compliance with respect to digital assets—as evidenced by its adoption of the digital asset question—and both the IRS and the agency’s Criminal Investigation division (IRS CI) have taken action to hold taxpayers accountable for reporting violations in recent years. While IRS audits focused on the underreporting of digital assets can lead to liability for civil interest and penalties, IRS CI investigations can lead to criminal prosecution, with potential consequences including fines and prison time.

Given that the IRS is prioritizing digital asset compliance in 2023, U.S. taxpayers need to prioritize compliance as well. For many, this includes not only accurately reporting their holdings and transactions from 2022 but also correcting filing failures from prior years. If a taxpayer’s 2023 filings raise red flags, the IRS (and IRS CI) can go back through several years of the taxpayer’s returns—and uncorrected errors from prior years can substantially increase the risks of facing an audit or investigation.

Do You Have Questions or Concerns About Digital Asset Reporting Compliance?

If you have questions or concerns about digital asset reporting compliance, you should speak with an experienced tax lawyer promptly. To schedule a confidential consultation with Kevin E. Thorn, Managing Partner of Thorn Law Group in Virginia, please call 703-752-3752, email ket@thornlawgroup.com or request an appointment online today.