Taxpayers were reminded on Tuesday by the Internal Revenue Service (IRS) that they must record all income connected to digital assets and respond to a new digital asset question on their federal income tax return for 2022 or risk penalties or delayed refunds.
In addition to other phrasing changes, the IRS stated in a press statement dated January 24 that the term “virtual currency” has been changed on 1040 forms this year to “digital assets.”
This year, to update revised terminology, the “Yes” or “No” question was expanded and revised as follows:
“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)?”
Tax forms 1040, Individual Income Tax Return, and 1040-SR, both feature the question at the top. Altogether with 1040-NR, U.S. Nonresident Alien Income Tax Return; and Seniors’ Tax Return.
Failure to do so may result in noncompliance with tax laws and the imposition of penalties. As it is a legal requirement to report all income on federal income tax returns, including income from digital assets.
Stablecoins, non-fungible tokens (NFTs), and cryptocurrencies are all included in the IRS’s detailed explanation of what constitutes as a digital asset.
The “Yes” box needs to be checked by taxpayers if they:
- Received digital assets as payment for property or services provided;
- Transferred digital assets for free (without receiving any consideration) as a bona fide gift;
- 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’s blockchain that splits a single cryptocurrency into two);
- Disposed of digital assets in exchange for property or services;
- Disposed of a digital asset in exchange or trade for another digital asset;
- Sold a digital asset; or
- Otherwise disposed of any other financial interest in a digital asset.
All income earned from the use of digital assets must be disclosed on the appropriate forms by those who check the “Yes” box. Use Form 8949, Sales and Other Dispositions of Capital Assets, for instance, if an investor sold cryptocurrency in 2022.
If a taxpayer just had digital assets in 2022 but didn’t use them in any transactions, they should check the “No” box.
Additionally, if they just moved digital assets from one wallet or account they control or own to another, or if they paid for digital assets with real money like the US dollar, they should select “No.”
There will be fewer tax refunds for many Americans.
Due to tax law changes, including the expiration of stimulus payments connected to the pandemic that would have otherwise increased return amounts, the IRS has issued a warning that many taxpayers should anticipate receiving reduced refunds this filing season.
On January 23, the day the IRS started accepting tax returns for 2022 earnings, the IRS issued a press statement, saying:
“Due to tax law changes such as the elimination of the Advance Child Tax Credit and no Recovery Rebate Credit this year to claim pandemic-related stimulus payments, many taxpayers may find their refunds somewhat lower this year.”
Although many taxpayers will receive lesser checks because of particular situations, not all taxpayers will see reduced refunds. Millions of Americans could receive pandemic assistance through the Recovery Rebate Credit if their stimulus payments did not cover the entire amount due to them.
This credit, which could only be used on tax returns from 2020 and 2021, was offered to cover any shortfalls from the first, second, and third rounds of stimulus checks. The third-round amounts were no longer available, and they could only be claimed on a 2021 tax return that was submitted in 2022. The stimulus checks were stopped in December 2021.
People, however, can consider filing an amended return, for those who may have missed the opportunity to claim to miss third-round stimulus payments can review their 2021 tax return.
In contrast to the expanded amounts of $3,600 for children under the age of 6 and $3,000 for children between the ages of 6 and 17, the Kid Tax Credit (CTC) has been decreased to $2,000 per child for tax returns filed in 2022.
The Additional Child Tax Credit (ACTC), which entitles some taxpayers to a refund of up to $1,500 of the CTC on their tax return, may be available to them.
Additionally, in 2022, a tax credit that working parents and those with adult dependents can both utilize to offset the cost of child care will be reduced.
The qualifying spending threshold increased from $3,000 to $8,000 for one qualified individual for the tax year 2021 and from $6,000 to $16,000 for two or more. From 35 to 50 percent of the population are now eligible for the credit.
However, starting in 2022, the amount of qualifying costs have been decreased once further, to $3,000 for a single person and $6,000 for two or more. There is currently 20 to 35 percent of qualified expenses that can be written off.
The child and dependent care credit are now completely recoverable due to the temporary enhancements. However, it has become non-refundable, meaning that at best it can only reduce one’s tax bill to zero for 2022.