The United States Internal Revenue Service (IRS), set to receive $80 billion in federal funding, has issued drafts of individual tax return Form 1040 and 1040-SR for the 2022 fiscal year that hint at taxable NFT benefits. Huh.
In a draft 2022 Form 1040, the IRS requires individual U.S. taxpayers to declare ownership or profit from any cryptographically secure digital value representations, including non-fungible tokens, stablecoins and virtual currencies.
If the taxpayer has received a digital asset as a reward, reward, or payment for property or services, the taxpayer must respond in the affirmative. These include obtaining cryptocurrencies through hard forks, mining, and other transaction verification methods such as staking. Furthermore, taxpayers should say yes if they get rid of any digital assets that were capital assets. First, they must use Form 8949 to calculate the capital gain or loss associated with that asset. Afterwards, they must file the capital gain or loss on Schedule D of Form 1040.
Any digital assets received from customers for the Services or sold to generate income must be reported. Reporting is similar to reporting income or loss from a sole proprietor using IRS Schedule C.
The good news for taxpayers is that they do not need to say yes if they hold or transfer crypto assets between their own wallets, purchased using fiat currency, during 2022.
IRS Rules Around Crypto and NFT Profits
The Internal Revenue Service considers crypto assets and NFT assets for tax purposes.
Questions about taxable crypto activity have appeared on income tax return forms since 2019. Accordingly, the 2021 Form included the crypto asset question:
“If you check yes, you’re flagging yourself, and the IRS is looking for any type of capital gain or loss on your Schedule D,” said Tommy Lucas, a certified financial planner.
Hodlers can benefit from a long-term capital gains tax of 0%-20%. Traders entering and exiting more quickly can pay up to 37% tax. If crypto firms do not keep detailed records, traders may be in trouble. Incomplete records make it difficult for traders to determine the cost bases of their crypto purchases, including NFTs. Finding out the cost basis is an important step in determining a crypto or NFT profit or loss.
IRS Enforces Enforcement Thanks to Federal Funding
If a taxpayer doesn’t answer the crypto question on Form 1040, the IRS can audit them. After that, the IRS can fine the taxpayer, or charge them with tax evasion.
Under the new Inflation Reduction Act, the IRS will receive $46 billion from the US federal government for tax crime enforcement. This includes cracking down on tax evasion related to cryptocurrency.
Recently, the IRS issued a “John Doe” subpoena to New York-based My Safra Bank for providing transaction records of clients of a crypto brokerage using the bank’s services. Subsequently, he intended to use these records to reveal non-compliance tax practices among the brokerage’s clients.
The US Attorney said, “The government is committed to using all tools at its disposal, including the John Doe Summons, to identify taxpayers who have underreported their tax liabilities by not reporting cryptocurrency transactions, and To make sure everyone pays their fair share.” Damien Williams at that time.
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