The AICPA recently suggested 12 FAQs that the IRS could post on its website to assist taxpayers and practitioners in responding to the new question about digital assets that appears on Form 1040, U.S. Individual Income Tax Return. The AICPA letter also asked that the Form 1040 instructions be modified next year, "to provide greater certainty to taxpayers and their preparers in confidently and properly complying with the question and overall reporting requirements for digital assets." The letter was signed by Jan Lewis, CPA, chair of the AICPA Tax Executive Committee.
The digital asset question included on the 2022 Form 1040 and discussed on p. 15 of its instructions asks: "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)?"
Among the 12 AICPA-recommended FAQs are:
- What is a digital representation of value? With the recommended answer: "A digital representation of value refers to any intangible asset capable of being stored on a computer or similar device and that can be converted to U.S. dollars or a fiat currency, or an asset with market value."
- What are the "characteristics of a digital asset" as that term is used in the 2022 Form 1040 instructions? With the recommended answer: "Until the IRS specifies such characteristics in published guidance, only digital assets that are a representation of value recorded on a cryptographically secured distributed ledger are to be considered in answering the 2022 Form 1040 digital asset question."
- Does a "yes" answer to the 2022 Form 1040 digital asset question mean that I have tax consequences from digital asset transactions that should be reported on my 2022 Form 1040? With the recommended answer: "Generally, yes," followed by a short discussion of the tax results from the acquisition or disposition of digital assets in different situations.
Other AICPA-suggested FAQs address the characteristics of a cryptographically distributed ledger, various ways taxpayers could receive or dispose of digital assets, and other issues.
The letter, dated Feb. 17, was sent to Douglas O'Donnell, acting IRS commissioner, and William Paul, IRS principal deputy chief counsel.
The AICPA has spoken with and commented to the IRS on digital asset federal tax issues, including on draft Form 1040 instructions in December 2022; a request for guidance and delay on Sec. 6045 and Sec. 6050I broker reporting requirements in October 2022; on the draft 2022 Form 1040 and instructions in August 2022; and also in prior years on various issues.
The AICPA also developed for AICPA Tax Section members this resource on state guidance on taxation and reporting of digital assets. For more information and resources, AICPA members can visit the virtual currency tax guidance and resources page.
— To comment on this article or to suggest an idea for another article, contact Martha Waggoner at Martha.Waggoner@aicpa-cima.com.