Written by: Rita M. Ryan, J.D, LL.M. & Richard Mak
In recent months, there have been updates made in the digital asset, crypto income, and information reporting space. These updates were not only made by the IRS in the United States, but from a global standpoint with the approval of new Crypto-Asset Reporting Standards by the Organization for Economic Cooperation and Development (OECD). There has also been an unexpected resolution in the Jarrett case against the U.S. that provides new guidance for digital and crypto asset holders.
Here we will explore the following updates:
- The expansion of crypto reporting question on Form 1040 – U.S. Individual Income Tax Return
- The Crypto-Asset Reporting Framework and Amendments to the Common Reporting Standard released by the OECD
- The dismissal of Jarrett v. United States
IRS Expands Crypto Question on Form 1040
The IRS has released the Form 1040 for the 2022 tax season which contains an expanded question about virtual currencies.
On the 2021 Form 1040, the question relating to virtual currencies was:
“At any time during 2021, did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency?”
The 2022 Form 1040 now states:
“At any time during 2022, did you: (a) receive (as a reward, award, or compensation); or (b) sell, exchange, gift, or otherwise dispose of a digital asset (or a financial interest in a digital asset)?”
The updated 2022 Form 1040 instructions note that digital assets are any digital representation of a value that is recorded on a cryptographically secured distributed ledger or any similar technology. The instructions further state that non-fungible tokens (NFTs) are included along with virtual and cryptocurrencies – an expansion many in the tax community were anticipating.
Essential Update for Continued Expansion
The change to the Form 1040 question was needed to capture the ever-developing forms of digital assets, which now include non-fungible tokens, security tokens, and central bank digital currencies, in addition to the more traditional digital currencies and cryptocurrency. The prior version of the previously stated question left many practitioners and taxpayers questioning their responses since virtual currency was seemingly a very narrow definition of the holdings in the digital asset space.
The move to expand the question highlights the IRS’s aspiration to make newer digital products and commodities fit into our traditional tax rules and regulations without commotion or ambiguity. Making assets and transactions more easily reportable leads to better compliance and, therefore, better tax revenue for the IRS and other tax authorities.
Practitioners will need to keep up with the ever-evolving digital landscape and await additional guidance on tax and information reporting of this type, which will hopefully be released in 2023.
New International Crypto-Asset Reporting Standards
The OECD published final guidance on the Crypto Asset Reporting Framework (CARF) and Amendments to the Common Reporting Standard (CRS).
The OECD is an intergovernmental organization founded to stimulate economic progress and world trade by developing and publishing guidance related to international tax issues. The CARF and CRS information standards aim to develop a global tax transparency compliance framework. This framework aims to combat tax evasion through automatic reporting, as well as the exchange of taxpayer information between countries relating to crypto assets.
The updated CARF rules for transactions subject to automatic reporting now include exchanges of crypto assets and fiat currencies and exchanges between crypto assets or general transfers of crypto assets. Those individuals and entities that provide the services noted above must apply due diligence procedures to identify their customers and report on an annual basis.
In addition to the CARF guidance noted above, the amendments to the Common Reporting Standard aim to enhance the scope of reporting to now cover specified electronic money products, central bank digital currencies, and indirect investments in crypto assets through investment entities and derivatives. Furthermore, due diligence and know-your-client standards have also been enhanced.
Why is This Important for U.S. Digital Asset/Crypto Holders?
The updates noted above result in financial institutions and crypto-asset service providers implementing information gathering and reporting systems to meet the expanded reporting requirements. For an ecosystem founded on a structure with no central authority and secure anonymity, this will inevitably be difficult.
While the U.S. does not currently participate in either CARF or CRS reporting, these standards provide a framework of reporting which could be emulated by U.S. government agencies as they navigate updating and implementing the required reporting in this expanding digital world.
Underwhelming Guidance: Jarrett V. United States
Joshua and Jessica Jarrett sued the IRS in an effort to force a judicial ruling that staking gains only be considered income when new tokens were sold. Although a bench trial was scheduled for early 2023, the United States filed a motion to dismiss the case since the federal income tax and statutory interest that was requested to be refunded in the Jarrett’s complaint was already fully refunded.
The U.S. District Court granted the government’s motion and dismissed the matter and further arguments from the Jarretts.
The dismissal in the Jarrett case leaves taxpayers with little additional guidance going into the 2022 tax season relative to the taxation of staking income. Although the guidance is ambiguous, the refund issued by the IRS, does provide some insight. In at least one instance, the IRS did not tax the receipt of newly created tokens (via staking) until those tokens were sold.
Please reach out to your engagement teams with any questions.
Rita Ryan, J.D., LL.M.
International Tax Senior Manager
Wolf & Company, P.C.
255 State Street, Boston, MA 02109
Direct +1(617) 419-4202
[email protected]
Kristin L. Stone, CPA, MST
Principal
Wolf & Company, P.C.
255 State Street, Boston, MA 02109
Direct +1 (617) 428-5464
[email protected]
Ryan P. Brunell, CPA
Principal
Wolf & Company, P.C.
255 State Street, Boston, MA 02109
Direct +1 (617) 933-3348
[email protected]
