Now that we’re into the first “full” week of February, things are truly heating up for us here at Jay, at least in terms of our communication volume.
And no, we aren’t replying to our emails using ChatGPT … but I wouldn’t be surprised if that happens at other Worcester County firms. The volume of communication that practices like ours receive during this season is HIGH.
Which is why we invest in our *human* infrastructure to handle the challenges of tax season. We believe in it so much that I even “poke the bear” by sending out emails like this.
But our clients are worth it. We will not jeopardize that good relationship by siccing a robot on it.
You know what else can ruin a good thing? Taxing it. This is why we work so hard: so the government doesn’t get its oversized paws on more of the money you’ve brought in through your own sweat (and sometimes tears).
Another probably-good thing falling prey to the taxman? Cryptocurrency.
Despite the volatile nature of it, there are still plenty of lucrative opportunities out there in crypto land that you can take advantage of (and that’s leaving aside its purported use case as an alternative means of exchange). But, of course, the government wants their cut — and thanks to the Inflation Reduction Act’s $45 billion injection to the IRS last summer to keep up with tax law enforcement, they’re going to start taking a harder look at whether you’re reporting said digital assets.
You don’t want to get caught unawares if you’re fully immersed in crypto trading or even just starting to dip your toe in.
If you did some crypto dealing in 2022, we should definitely know about that when you meet with us … which, if you haven’t yet, time to get on that:
And while we’re sitting down to look at your tax liability, we can discuss deductions to help offset taxation of your digital assets.
For example, buy an EV vehicle in 2022? Thanks to the same Inflation Reduction Act, there are better credits waiting for EV purchasers (Tesla owners rejoice). Even the treasury is doing its part to reclassify what’s labeled an SUV to help EV owners take advantage of the $7500 deduction. That could be you.
But let’s get back to discussing your crypto assets and prepping you for filing your 2022 return…
Worcester County 1040-Filer: How to Handle Crypto Assets on Returns
“A person doesn’t know how much he has to be thankful for until he has to pay taxes on it.” – Ann Landers
You’ve probably heard a lot by now about crypto, the virtual currency that seems to make headway every week for being incredibly valuable or incredibly worthless.
The IRS has heard about it, too — and they want to know more.
This evolving headline asset is an evolving tax question, too — and a potential headache if you disclose crypto info incorrectly on your upcoming federal tax return. To that end, the IRS has a new question for Worcester County 1040-filers to answer about crypto assets.
One answer about your crypto assets, please
Taxpayers must again answer a digital asset question when they file their federal income tax return, as we’ve all had to do for a few years. Right on the top of 2022 Form 1040 return you’ll see:
“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)?”
The question is also on Form 1040-SR, “U.S. Tax Return for Seniors” and on the 1040-NR, “U.S. Nonresident Alien Income Tax Return.” On all forms, there’s a box to tick Yes and a box to tick No.
You cannot hit the Pass button on this one: Everybody answers.
The term “digital assets” has replaced “virtual currencies,” a term the IRS used in previous years. (For example, last year’s question was, “At any time during 2021, did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency?”)
They also made the new instructions clearer — a big improvement over previous years’ returns, when even yes or no was a hard answer to be sure of.
So did you or didn’t you?
It can be hard to know if you dealt in something without being certain what that something is. What’s a “digital asset” (a more encompassing term that includes crypto assets)? Eager to help, the IRS says:
“A digital asset is a digital representation of value which is recorded on a cryptographically secured, distributed ledger. Common digital assets include convertible virtual currency and cryptocurrency, stablecoins, and non-fungible tokens (NFTs).”
You can check “No” if you just owned digital assets (including crypto assets) during 2022 and didn’t engage in any transactions involving them during the year. (Of course, check “No” if you had nothing to do with digital assets, too.)
Also, check the “No” box if your activities were limited to:
- Holding digital assets in a wallet or account;
- Transferring digital assets from one wallet or account you own or control to another wallet or account you own or control; or…
- Purchasing digital assets using U.S. or other real currency, including through online platforms such as PayPal and Venmo.
“Normally” (whatever the IRS means by that), you have to tick the “Yes” box if you:
- Received digital assets as payment for property or services;
- Transferred digital assets for free as a bona fide gift;
- Received digital assets as a reward or award; or…
- Received new digital assets resulting from “mining” (crypto creation), “staking” (passive crypto income similar to a stock dividend), and similar activities.
Also check “Yes” if you received digital assets from a hard fork (a branching of a cryptocurrency’s blockchain that splits a single cryptocurrency into two, kind of like a stock split); disposed of digital assets in exchange for property or services or in exchange or trade for another digital asset; sold a digital asset; or “otherwise disposed” of any other financial interest in a digital asset.
Don’t forget to report crypto assets
Uncle Sam isn’t done with you just because you checked “Yes.” Now you have to report any income from digital assets.
The IRS treats cryptocurrency as “property” for tax purposes, not unlike a share of stock. When you sell virtual currency, you recognize capital gain or loss on the sale. You file IRS Form 8949, Sales and other Dispositions of Capital Assets, to figure your capital gain or loss, then report it either on your Schedule D or Form 709 for a gift. If you were paid with digital assets, you report that money as wages.
C’mon, the IRS can’t even process all the paper tax returns it gets in a year. You mean to say they’re going to come after me and my Bitcoin?
Yeah, pretty much. You might have heard the IRS got a ton of new funding from Capitol Hill over the summer — and they’ve pledged that a big chunk of that money is going toward enforcement of crypto abuse. Don’t fool around with this question that’s suddenly a fixture on your tax return.
If you want some help ironing out the latest wrinkles with your crypto assets on your tax return, don’t hesitate to reach out (the sooner, the better!).
In your corner,