Now that it’s time to file your freelance tax return.

You may have questions about how to report your cryptocurrency (which the IRS now refers to as “digital assets” instead of virtual currencies).

Why is it so important to carefully report your digital asset activity, especially this year?

Penalties for not reporting cryptocurrency activity could be significant.

Penalty

The IRS may impose a penalty of up to $250 per customer, up to a maximum of $3 million.

For failure to timely file the correct Form 1099 with the IRS under IRC 6721 and a penalty of up to $250 per customer.

Up to a maximum penalty of $3 million. , for failure to timely provide the correct Form 1099 to the customer under IRC 6722.

Deficiences

These penalties may be reduced if such deficiencies are corrected in a timely manner.

To help you understand the impact of digital assets on your tax return.

Here are answers to some frequently asked questions about reporting them under the latest digital asset tax laws:

What is a digital asset in the eyes of the IRS?

According to the IRS, “a digital asset is a digital representation of value that is recorded on a cryptographically secure, distributed ledger. Common digital assets include:

Convertible virtual currency and cryptocurrency
Stablecoins

Non-Fungible Tokens (NFT)

All cryptocurrency exchanges are now also considered “brokers” similar to traditional investment brokers.

Digital assets are considered the same as securities in the eyes of the IRS, similar to stocks, bonds and certain types of commodities.

The tax treatment of digital assets is therefore essentially the same as before: you have to pay capital gains taxes.

Does everyone have to declare their digital asset activity on their tax returns?

Yes, even if you haven’t had any digital asset transactions.

Report

You must answer the digital assets question at the top of Form 1040 and report any digital asset-related income when you file your 2022 federal income tax return.

For the 2022 tax year, the digital asset question you must answer is: “At any time during 2022:

(a) you received (as consideration, consideration or payment for property or services);

(b) sold, exchanged, donated or otherwise disposed of the digital asset (or financial interest in the digital asset)?”
When do I check “Yes” to the digital assets question on my tax return?

The IRS states that you must check the “Yes” box if:

Digital Assets

Received digital assets as payment for property or services rendered;
Digital assets transferred free of charge (without receiving any consideration) as a bona fide donation;
Received digital assets resulting from a reward or award;
Received new digital assets resulting from mining, staking and similar activities;
Received digital assets resulting from a hard fork (a branching of a cryptocurrency blockchain that splits one cryptocurrency into two);
Liquidation of digital assets in exchange for property or services;
Retirement of a digital asset in exchange or exchange for another digital asset;
Sold a digital asset; or
Otherwise, it divests itself of any other financial stake in the digital asset.
How do I report income from digital assets?

In addition to checking the “Yes” box, all income related to any digital asset transactions must be reported.

For example: If you held a digital asset as a capital asset and sold, exchanged, or transferred it during 2022.

Transaction

You must use Form 8949, Sales and Other Dispositions of Capital Assets, to calculate any capital gain or loss from the transaction and then report it. on Schedule D (Form 1040).

Capital Gains and Losses, or Form 709, United States Gift (and Generation-Skip Transfer) Tax Return in the case of a gift.

If you paid employees with digital assets, you must report the value of those assets as wages.

If you worked as an independent contractor and were paid with digital assets, or did so for a contractor you hired.

Business Profit

You must report the income on Schedule C (Form 1040), Business Profit or Loss (Sole Proprietorship). Schedule C must also be used if you have sold, exchanged or transferred digital assets to clients in connection with a trade or business transaction.

When should I answer “No” to the digital assets question on my federal freelance tax return?

If your only exposure to digital assets during 2022 was owning them and not making any transactions, you can check the “No” box on Form 1040.

The same is true, according to the IRS, if your digital asset activity was limited to:

Holding digital assets in a wallet or account;
Transfer of digital assets from one wallet or account owned or controlled by them to another wallet or account owned or controlled by them; or
Purchase of digital assets using US or other real currency, including through electronic platforms such as PayPal and Venmo.
What other reporting standards apply to digital assets for 2022 freelance tax returns?

In 2022, new cryptocurrency legislation was passed under the IIJA, a clear sign that regulation of digital currencies from a tax perspective is a priority for the government.
The IRS issued Notice 2014-21, 2014-16 I.R.B. 938PDF, explaining that virtual currency is treated as property for federal income tax purposes and providing examples of how longstanding tax principles applicable to transactions involving property apply to virtual currency.

The Frequently Asked Questions (“FAQ”) below expand on the examples provided in Notice 2014-21 and apply the same longstanding tax principles to other situations.

Sources: Blog.freelancersunion | IRS.gov