2022 IRS Income Tax Form includes NFT earnings as source of income

The U.S. Internal Revenue Service (IRS), which is set to receive $80 billion in federal funding, has released draft individual tax return forms 1040 and 1040-SR for fiscal year 2022 that hint at taxable NFT earnings.

In the 2022 draft Form 1040, the IRS requires individual U.S. taxpayers to report ownership or earnings of any crypto-secured representation of digital value, including non-fungible tokens, stablecoins, and virtual currencies.

The taxpayer must answer in the affirmative if they received digital assets in the form of rewards, rewards or payments for goods or services. These include receiving cryptocurrencies through hard forks, mining, and other transaction validation methods such as staking. Additionally, taxpayers must say yes if they disposed of any digital asset that was a capital asset. First, they must use Form 8949 to calculate any capital gains or losses associated with that asset. Then they should record the capital gain or loss on Schedule D of Form 1040.

All digital assets received from customers for services or sold to customers to generate revenue must be reported. Reporting is similar to how a sole proprietor’s income or loss is reported using IRS Schedule C.

The good news for taxpayers is that they don’t need to say yes if they hold or move crypto assets between their own wallets that they purchased using fiat currency in 2022.

IRS rules regarding crypto and NFT earnings

The Internal Revenue Service considers crypto assets and NFT property for tax purposes.

The question about taxable crypto activity has appeared on tax return forms since 2019. As a result, the 2021 form contained the question about crypto assets:

“If you check yes, you’re reporting yourself and the IRS is going to look for some kind of capital gain or loss on your Schedule D,” said Tommy Lucas, a certified financial planner.

Hodlers may benefit from a longer-term capital gains tax of 0% to 20%. Merchants who enter and exit faster could pay up to 37% tax. If crypto firms do not keep detailed records, traders could get into trouble. Incomplete records make it difficult for traders to determine the cost bases of their crypto purchases, including NFTs. Knowing the cost basis is a critical step in determining crypto or NFT gains or losses.

IRS bolsters law enforcement with federal funding

If a taxpayer does not answer the cryptographic question on Form 1040, the IRS might verify it. After that, the IRS could then fine the taxpayer or charge him with tax evasion.

Under the new Inflation Reduction Act, the IRS will receive $46 billion from the US federal government for the fight against tax crime. This includes cracking down on cryptocurrency-related tax evasion.

Recently, the IRS issued a “John Doe” summons to New York-based MY Safra Bank to provide records of customer transactions from a crypto brokerage firm that used the bank’s services. Subsequently, they intended to use these recordings to expose non-compliant tax practices among the brokerage firm’s clients.

“The government is committed to using all tools at its disposal, including John Doe summonses, to identify taxpayers who have understated their tax obligations by not reporting cryptocurrency transactions, and to ensure everyone pays their fair share,” the U.S. attorney said. Damian Williams at the time.

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