(Bloomberg Act) - The IRS has provided clarity to US cryptocurrency holders on how to report digital assets on 1040 income tax forms, in what could be regulatory guidance.
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In a year when the Internal Revenue Service's draft guidelines for 2022 tax forms, released Monday night, expanded the way taxpayers report their crypto transactions, including changing the wording of "virtual currency." become a "digital resource".
Adnan Islam, finance partner at Markham LLP, says: "They are consistent with industry terminology and cover more possible crypto transactions."
More clarity is welcome, tax experts say, but getting guidance remains their main concern.
In August, the IRS expanded cryptocurrency requirements on the 1040 tax form, requiring taxpayers to report whether they received cryptocurrency as a "gift, gift or compensation."
The latest guidelines turn “virtual currency” into digital assets, citing the definition in Section 6045 of the Revised Cryptocurrency Reporting Requirements of the Infrastructure Act of 2021. According to the agency, digital assets include NFTs and virtual currencies.
Miles Fuller, TaxBit's head of government solutions and a former senior adviser to the IRS's legal department, said the wording change is a good sign that the agency is preparing further guidance.
"The IRS is expanding its vocabulary around the term digital assets in this law," he said. “So that means that in the near future we will likely see the rules come out and the IRS will continue to move forward with implementing the regulatory regime. Maybe sooner rather than later."
While there is no penalty for not voting "Yes" on Form 1040, a taxpayer who understates their income may incur penalties and interest on unreported crypto income. The revised form will help taxpayers clarify how to avoid it, tax experts say.
Financial needs are outlined in the revised education blueprint, once again the sector is looking for guidance. “Financial interest,” he said, “if you have a record of digital assets, or have ownership in an account containing one or more digital assets, including rights and obligations to receive financial interest, or have a portfolio containing digital assets. "
"They never really defined what that meant," Fuller says.
BDO partner Kevin Ainsworth says the definition of financial interest is what tax professionals expect. Ainsworth said he wants to see a more specific example so taxpayers know whether or not to check a box on the form.
The draft form explains that if the taxpayer accepts digital assets as "mining, storage, etc.," check the "Yes" box on the form. "Similar assets" could include decentralized finance or DeFi assets such as liquidity pools, said Lisa Zarlenga, a partner at Steptoe & Johnson LLP and a former Treasury tax adviser.
Education forms are non-binding directions in tax disputes, so taxpayers may not be able to rely on them, he said.
"Think about it, in practice, most taxpayers rely on the guidelines to fill out their tax forms every day," Zarlenga said. "And if you believe what these guidelines say and the IRS objections, it doesn't seem fair for you to come back to this court and say that's what I'm relying on."
Claiming digital assets on Form 1040 "has nothing to do with actual taxes" and is based on subsequent disclosure, Fuller said.
Guidelines or laws, especially in the mining and betting industry and governing NFTs, are what industry experts say they really need.
Trying to change directions and shape is "like reading tea leaves," Zarlenga says. He says he prefers to drive.
To contact the reporter for this story: Erin Slowey in Washington at eslowey@bloombergindustry.com
To contact the editor responsible for this story: Meg Shreve at mshreve@bloombergindustry.com; Butch Maier at bmaier@bloombergindustry.com
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