Since 2019, Form 1040 has included a general question regarding the taxpayer’s cryptocurrency activity. (See prior coverage here.) Over the years, the IRS has modified the scope of its cryptocurrency inquiry. On the 2021 Form 1040, this question read: “At any time during 2021, did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency?” The IRS expanded the scope and specificity of this question on the 2022 Form 1040, by including the bolded language: “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 Form 1040’s instructions indicate, as in prior years, that taxpayers answering this question in the affirmative must report their income, gain or loss from such transactions on their tax return. However, the IRS is now casting a much broader net, which will result in disclosure of other digital assets beyond cryptocurrencies including nonfungible tokens (“NFTs”) as well as ordinary income generating activities where digital assets are received as payment.

To ensure that the expanded scope of the revised Form 1040 question and the corresponding reporting obligations are not missed by taxpayers, the IRS recently published IRS Tax Tip 2023-45 (“Tax Tip”) reminding individual taxpayers of their obligation to report certain information on these digital asset transactions as part of their annual tax returns. The Tax Tip elaborates on the Form 1040 requirement by providing examples of digital asset transactions (e.g., receipt of digital assets in mining and staking activities or as the result of so-called hard forks) as well as indicating supplemental forms to be filed in addition to the Form 1040 (e.g., Form 8949 for dispositions of capital assets, Form 709 for gifts, etc.). The broadening of the Form 1040 question, together with the Tax Tip, are indicative of the IRS’s increased interest in unearthing and capturing taxes attributable to an individual’s cryptocurrency and NFT transactions.