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

The IRS is sharing more details on how to report digital assets for the 2022 tax filing year, according to draft instructions.

Since 2019, there has been a yes or no “virtual currency” question on tax returns, requiring filers to check a box to disclose their taxable crypto activity. For 2022, the agency has changed the term “virtual currency” to “digital asset,” with more guidance on when to tick “yes.”

In particular, “digital asset” now includes non-fungible tokens, or NFTs, which provide ownership of items such as art and stablecoins, which are tied to a real-world value.

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“I think it’s a good change,” said Matt Metras, a registered agent and cryptocurrency tax specialist at MDM Financial Services in Rochester, New York. “People who trade things like NFTs don’t want to think of it as a virtual currency.”

The “broader language” could include new categories, such as taxpayers who receive digital assets from “games to make money,” which have become popular in the past year, he said.

“The IRS is always going to be behind the eight ball because they just can’t keep up with how fast the crypto space is changing,” Metras said.

The draft instructions say filers must check “yes” if they received digital assets as a reward, prize or payment for property or services. And the agency can also claim “yes” if filers sold, exchanged or gifted digital assets.

Despite the agency’s efforts to clarify guidance on digital asset reporting, questions remain for filers and tax professionals.

For example, filers do not need to file a tax return for transfers under $16,000 for 2022. However, the question requires taxpayers to check “yes” for gifts that may be under that amount, said Andrew Gordon, tax attorney, CPA and president of the Gordon Law Group in Skokie, Illinois.

This can lead to IRS processing problems without corresponding gift activity elsewhere on the return. Overall, “there still appears to be an education gap for taxpayers,” he added.

The American Institute of CPAs has also expressed concern about the lack of clarity for taxpayers, referring to the “cryptographically secured distributed ledger” in the instructions, which could confuse filers.

“We suggest that the IRS and Treasury keep the issue focused on ‘virtual currency’ until proposed and final regulations are issued defining ‘digital assets,'” said Eileen Sherr, director of tax policy and advocacy at the American Institute of CPAs.

The organization submitted comments to the IRS on the issue in late August, asking for revisions and clearer instructions with examples before completing their 2022 tax returns.